Skip to main content

Full text of "Study of pharmaceutical benefit management"

See other formats


HCFA Study of the Pharmaceutical Benefit Management Industry 




Study of Pharmaceutical Benefit Management 

HCFA Contract No. 500-97-0399/0097 

Federal Project Officer: Dr. Peri Iz 

June 2001 

Pricba/aTerhouseQopers fB 

The statements contained in this report are solely those of the authors and do not necessarily 
reflect the views or policies of the Health Care Financing Administration. The contractor 
assumes responsibility for the accuracy and completeness of the information contained in this 
report. 




1 



(*2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Acknowledgments 

PricewaterhouseCoopers LLP would like to acknowledge the efforts of all those who 
through access and shared knowledge have contributed to the preparation of this study. 

Special thanks are due to those individuals in the pharmaceutical/pharmacy and employer 
benefit fields who generously shared their perspectives and insights with the project team 
during field discussions: 



Merck-Medco Managed Care, L.L.C. 
Caremark Rx, Inc. 
Express Scripts Inc. 
AdvancePCS 

Coca-Cola Enterprises Inc. 
United HealthCare 



State of Mississippi 
Tribune Companies 

Pharmacy Benefit Management Institute 
Mid Atlantic Medical Services Inc. 
PepsiCo 
Steele as e, Inc 



Many thanks to HCFA project staff, and in particular, Dr. Peri Iz, Project Officer, for her 
thorough and probing inquiries and her careful review and consideration of all the 
elements composing this study. 

For information on this report, please contact PricewaterhouseCoopers LLP: 

Don Weber 

PwC Atlanta Office 

404 -870-1417 

John Reddan 

PwC Chicago Office 

312-701-5837 

Michael J. Keegan 

PwC Washington, DC Office 

703-465-6922 



2 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 
Table of Contents 



Executive Summary Pg. 5-12 

1.0 Introduetion Pg- 13 

2.0 Structure-Related Issues Pg. 14-64 

2.1 Industry Structure Overview Pg. 15^9 

2.1.1 Structural Evolution and Market Dynamics Pg. 16-26 
Driving the PBM Industry 

2.1.2 Macro Trends in Drug Spending and Utilization Pg. 27-34 

2.1.3 PBM Profiles and Landscapes Pg. 35-36 

2. 1 .4 Industry Stability and Major Challenges Pg. 37-40 
Facing the PBM Market 

2.1.5 PBM Legislative and Regulatory Environment Pg. 41^8 

2.1.6 Important Trade Organizations Pg. 49 

2.2 Industry Capacity Overview Pg. 50-57 

2.2.1 PBM Operations Pg. 51-55 

2.2.2 PBM Capacity Considerations Pg. 56-57 

2.3 Local Market Structure and Roles of Pg. 58-59 
Pharmacy Networks 

2.4 Overview of PBM Financials and Pricing Pg. 60-64 

2.4.1 Fee-for-Service Contracts Pg- 62 

2.4.2 Risk Sharing (Shared Savings) Contracts Pg. 63 

2.4.3 Capitated Contracts Pg. 63-64 

3.0 Operations Related Issues Pg. 65-128 

3.1 Services Pg. 66-86 

3.1.1 PBM Administrative Services Pg. 67-79 

3.1.2 PBM Clinical Services Pg. 80-86 

3.2 PBM Financials and Pricing Pg. 87-90 

3.2.1 Administrative Fees (Claims Processing) Pg- 87 

3.2.2 Pharmacy Reimbursement and the Cost of Pharmaceuticals Pg. 87-89 

3.2.3 Rebate Administration and Payment Pg. 89-90 



3 



v9200l, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



3.3 Contracts 

3.3. 1 Types of Contracts 

3.3.2 Comparative Analysis of PBM Contracts 

3.4 Bidding Rules and Selection Process 

3.4.1 Bidding Overview 

3.4.2 The PBM Selection Process and Criteria 

3.4.3 Implementation Process 

3.4.4 Medicare Selection/Implementation Schedule 

4.0 Performance Measurement 

4.1 Cost and Utilization Measurements 

4.2 Performance Indicators and Benchmark 

4.2.1 Administrative Performance Benchmarks and Guarantees 
4.2.2. Pricing Benchmarks and Guarantees 

4.2.3 Access and Network Performance Benchmarks 
and Guarantees 

4.2.4 Mail Order Dispensing and Retail Pharmacy 
Benchmarks and Guarantees 

4.2.5 Levels of Guarantees and Incentive Payments 

4.2.6 PBM Performance in Relation to Guarantees 
and Benchmarks 



Pg.91-102 

Pg.91-94 

Pg.95-102 

Pg. 103-128 
Pg. 104-108 
Pg. 108-114 
Pg. 115-123 
Pg. 124^128 

Pg. 129-142 

Pg. 130-132 

Pg. 132-141 
Pg. 132-134 
Pg. 135-136 

Pg. 136-137 

Pg. 137-138 
Pg. 138 

Pg. 138-140 



4.3 Performance Expectations and Administrative Requirements 
for a Senior Population 

4.4 Overall PBM Performance Assessment 
5.0 Concluding Remarks 

Appendices: 

Appendix A: List of Exhibits 
Appendix B: Glossary 
Appendix C: Bibliography 

Appendix D: PBM Customer Satisfaction Survey Tool 



Pg. 140 
Pg. 141-142 
Pg. 143-145 



Pg. 146-148 
Pg. 149-151 
Pg. 152-155 
Pg. 156-157 



4 



£2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

EXECUTIVE SUMMARY 

Pharmacy benefit managers (PBMs) have emerged as the national standard for the 
administration of prescription drug insurance in the United States. Today, in an 
environment of rising drug costs and utilization, PBMs provide pharmacy benefits to 
nearly 200 million Americans, including 65% of our country's seniors. The PBM's 
ability to reduce costs, provide national pharmacy access, and administer benefits that are 
customized to meet the needs of a wide range of clients in a highly automated 
environment all attribute to the success of the industry. 

The clients of a PBM are primarily major employers, insurers and managed care 
organizations. The client works with the PBM to decide the pharmacy benefit (i.e., 
insurance coverage for prescription medication) that it will offer, including the drugs that 
will be covered, the beneficiary's cost sharing requirements, and the pharmacy network. 
The client then retains the PBM to administer the pharmacy benefit for its members or 
employees. 

One of the primary reasons clients retain PBMs, is that PBMs reduce the cost of offering 
a pharmacy benefit. PBMs do this by automating administrative services, obtaining 
discounts on drugs (ingredient cost), and managing drug utilization. For example, PBMs: 

• Reduce administrative cost by using a highly automated environment to electronically 
process claims at the point of service (e.g., pharmacy where prescription is 
dispensed). Over 99% of pharmacy claims are processed in this manner, at an 
average cost of $.30 to $.40 per claim. 

• Reduce ingredient cost by obtaining pharmacy-pricing discounts from dispensing 
pharmacies, and rebates from pharmaceutical manufacturers. These discounts are 
obtained under contracts, and shared or passed on to clients. The cost of 
prescriptions, which average around $60.00, can be reduced as much as 30% to 35% 
by a PBM's programs. 

• Manage utilization and favor lower cost medications by using clinical services that 
influence the behavior of the physicians, pharmacist and patient. 

Over the last 10 years the PBM industry has grown dramatically, and undergone several 
major restructuring trends. These trends include: 

• Explosive growth of the PBM industry into the mid-1990s as managed care 
organizations, insurers and later self insured employers sought to reduce the cost of 
their pharmacy benefit by contracting with PBMs to receive manufacturer rebates and 
pharmacy network discounts; 



5 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• Acquisition of several leading PBMs by manufacturers in the early 1990s (Merck- 
Medco, SmithKline Beecham-DPS, and Lilly-PCS). These acquisitions were the 
result of manufacturer's concern over losing access to the lives managed by the PBM, 
and were partly prompted by the proposal of healthcare reform under the Clinton 
Administration. Since the number of lives covered by the PBM drove up the premium 
paid by the manufacturer, PBMs took on additional lives in an effort to become an 
attractive acquisition candidate. To do this, PBMs lowered their claims processing 
fees and rebate retention rates, and in some cases assumed risk for the cost of the 
pharmacy benefit. As a result of these actions the industry took on unprofitable 
business. 

• In the mid-1990s, the business matured and manufacturers realized they were not 
receiving the expected value from their PBM acquisitions or rebate payments. Most 
manufacturers increased the performance criteria for PBMs to earn rebates. PBM 
profits, already hurt by the acquisition frenzy in the early 1 990s, were further 
impacted by the reduction of rebates from manufacturers. As a result, PBMs 
introduced expanded services that differentiated them as clinical and pharmaceutical 
cost managers and began to scrutinize their unprofitable clients. 

• In the late 1 990s through the present, the PBM industry has been restructuring to 
restore profits. Lilly and SmithKline Beecham divested their PBMs, and the industry 
has seen consolidation as the leading PBMs seek to achieve economies of scale and 
improve profitability, as well as increase their negotiating power with manufacturers 
and retail pharmacies. The most significant consolidations include Advance 
Paradigms acquisition of PCS, and Express Script's acquisitions of ValueRx and 
DPS. 

The industry now appears to be stabilizing, and is focused on managing costs and 
utilization for its clients. Today, there are 4 leading PBMs in the United States 
(AdvancePCS, Caremark Rx, Inc., Express Scripts Inc., and Merck-Medco Managed 
Care, L.L.C.) plus several that are owned by insurers (Aetna, Wellpoint) and retail chains 
(Walgreens, New Eckerd Health Services). 



6 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 1: Leading PBMs 



Segment 


PBM 


Covered Lives 


Large PBMs, managing 
over 20 million lives 


Advance PCS 


75,000,000 


Merck-Medco 
Managed Care, L.L.C. 


65,000,000 




Express Scripts, Inc. 


42,000,000 




CaremarkRx, Inc. 


20,000,000 


Insurer owned PBMs 


Wellpoint 


15,000,000 




Aetna 


4,800,000 


Retail pharmacy chain 
PBMs 


New Eckerd Health 
Services 


16,000,000 




Walgreens 


2,000,000 



Macro Trends in Pharmacy Benefits 



PBMs are challenged: managing drug costs in a time of rising drug prices. Drug prices 
are rising faster than inflation, and becoming a larger percentage of our nations overall 
health care spending. Rising drug prices can be attributed to a number of factors, which 
include increased drug utilization and the growth in the number of new, more expensive 
drugs. More specifically: 

• The cost of drugs over the next eight years is expected to rise between 10 —15% per 
year; 

• By 2010, it is expected that drug expenditures will be approximately 13.8% of 
national health expenditures, up from 6.10% in 1995; 

• Between 1992 and 2000 drug utilization (unadjusted for changes in population) 
increased 52%; 

• Drugs introduced since 1992 represent 25.4% of all prescriptions, but account for 
40.8% of the cost. 



7 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Much of the increased utiHzation is expected to come from seniors. It is generally 
accepted that seniors need more prescription drugs than non-seniors. Seniors represent 
approximately 13% of the nation's population, but account for over one-third of the 
nations drug spending. As a result, this population is expected to continue to contribute 
disproportionately to the rising use and cost of drugs, especially as "Baby Boomers" near 
retirement age. 

Many of the new drugs being developed reflect the demographic changes driving the U.S. 
healthcare system. These are drugs designed for geriatric patients or chronic conditions. 
Other drugs expected to become available target previously untreatable diseases, with a 
percentage intended to improve the patient's lifestyle (e.g., Viagra). These new drugs 
will challenge PBMs to continue to educate clients and members and manage utilization 
and costs, while providing coverage. 

PBM Operations 

PBMs have large scale, highly automated operations to process claims and provide 
customer (client, member) service. The services a PBM provides can be categorized as 
administrative or clinical. Administrative services include benefit administration, 
enrollment and eligibility administration, pharmacy network administration, mail 
pharmacy service, claims adjudication, and manufacturer contracting and rebate 
administration. Clinical services range from formulary management to sophisticated 
utilization and disease management programs. 

PBM services revolve around the drug benefit designed by the client. The benefit design 
determines the drugs that are covered, and the extent to which generics and formulary 
drugs are mandated. As a part of the drug benefit, a co-pay structure is developed which 
determines the cost sharing between the client and its employees or members. PBMs 
receive enrollment information from their clients, and maintain the pharmacy benefit 
eligibility files. 

PBMs establish and maintain large pharmacy networks with chain and independent 
pharmacies, through which drugs are dispensed to members. The leading PBMs have 
over 55,000 retail pharmacies in their networks. In addition, PBMs operate or contract 
with mail pharmacies, Internet pharmacies, and specialty pharmacies (for high cost 
drugs) focused on conditions like HIV or organ transplants and new biotech products. 
Pharmacies contract with PBMs and agree to discount their pricing to gain access to the 
PBM's members. 

Some PBMs operate mail pharmacies to improve member access and help their clients 
control drug costs. Mail pharmacies offer better pricing than retail pha rmacies, but are 



8 



©2001. PncewaterhouseCoopers LLP 



HCFA Study of the P harmaceutical Benefit Management Industry 

limited to providing chronic drugs since there is a delay of several days in the members 
receipt of the medication. 

PBMs offer their clients a highly automated claims-processing environment. Over 99% 
of all pharmacy claims are electronically adjudicated at the point of service (i.e., the 
pharmacy where the drug is dispensed) when the claim is entered by the dispensing 
pharmacist. The claims system tests the member's eligibility and benefit design to 
determine pharmacy reimbursement and member's co-pay. The claims processing system 
also applies a series of edits and messages during adjudication to verify the drug is 
covered and does not conflict with other drugs the patient is taking. 

PBMs contract with pharmaceutical manufacturers of branded drugs to receive rebates 
and administrative fees (rebates are not paid for generic drugs). Manufacturers typically 
pay these rebates for increases in market share and/or utilization of their products. It is 
common for PBMs to retain the administrative fees, and share the rebates with their 
clients. PBMs that operate mail pharmacies may receive extra rebates or better pricing for 
specific drugs purchased through those pharmacies. 

PBMs also provide clinical programs to their clients, which provide the basis for 
ingredient cost savings. These programs include: 

• Formulary management. A formulary is a list of drugs favored by the PBM for their 
clinical effectiveness and cost savings. Pharmaceutical manufacturers of branded 
drugs often pay rebates to have their drugs featured on the formulary. 

• Therapeutic substitution programs in mail pharmacies. These programs encourage 
physicians and/or patients to switch to lower cost comparable drugs. 

• Disease management programs. These programs identify and categorize patients with 
chronic conditions and direct them toward an appropriate treatment protocol. 

In our discussions with the leading PBMs, there was general consensus that providing 
services to the Medicare population would not have a significant impact on the industry. 
This statement is based on the following: 

• Most PBM operations are highly automated and relatively insensitive to volume 
increases; 

• All of the leading PBMs have demonstrated a capability to rapidly scale-up operations 
for new, large clients; 

• The PBM industry already manages the drug benefits of approximately 65% of the 
country's seniors. 



9 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

The incremental volume to the industry if a Medicare drug benefit is created is expected 
to be approximately 11-14 million lives - roughly the size of a large new client. 

PBM Economics 

PBMs operate on low profit margins (5% or less), collecting fees from clients and 
manufacturers. PBM revenues are based on administrative fees for claims processing and 
may include a portion of the ingredient cost savings achieved for clients. In general: 

• Clients pay PBMs as a pass through of ingredient costs (discounted reimbursements to 
pharmacies) plus a transaction-based claims processing fee; 

• PBMs also share or pass through manufacturer rebates with clients; some PBMs retain 
an administrative fee from the manufacturer for administering the rebate program; 

• Clients engaging in clinical programs may pay for the programs on a fee for service or 
shared savings basis. Under a shared savings arrangement the PBM and the client 
assume some risk for the cost of the drug program. This approach is an alternative 
method of paying the PBM, and is based on a percentage of savings that result from 
the PBM's clinical program. 

The fees the PBM receives from its clients and retains from manufacturers are a very 
small percentage of the total cost of a pharmacy benefit. Clients interested in managing 
the cost of their drug benefits typically find their best opportunity through restricted plan 
designs including changes in their member's cost sharing requirements, smaller networks, 
and the introduction of clinical management programs. 

Selecting a PBM 

Based on our discussions with the leading PBMs and clients, we expect HCFA's 
selection of a PBM(s), and implementation of a Medicare drug benefit to take up to 24 
months. This includes one year to plan the program and select a PBM, and a second year 
to implement the program, which includes setting pricing, establishing a network, and 
notifying and educating beneficiaries. 

Proven processes have been established for selecting and retaining a PBM. These 
processes are based on an RFP that describes a client's objectives, and proceeds through 
vendor selection, negotiation, implementation, and the on-going monitoring of the PBMs 
performance. The selection process includes proposal analysis, PBM site visits, and client 
reference checks. 

Once selected, a PBM typically requires 90 days to implement a large client. However, a 
Medicare benefit could take up to a year after the PBM(s) has been selected before 



10 



g2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



"going live" due to the size and complexity of the population, and the effort needed to 
educate the seniors about their benefit. Client implementation includes loading the 
benefit and eligibility files into the claims processing system, establishing the pharmacy 
network, educating members about their benefit, and establishing the necessary customer 
service functions. HCFA may also need to develop new, internal programs to align with 
the PBM's service. These could include managing enrollment and eligibility, collecting 
member premiums, as well as monitoring, and possibly managing, utilization and cost. 

An overview of the selection and implementation process is provided below. 

Diagram 1: Selection and Implementation Timeline 




SELECT PBM 

Deflne Goals and objectives 
Develop and issue RFP 

Analyze proposals, visit sites, check references 
Select PBM 

IMPLEMENT MEDICARE PROGRAM 
Build internal (HCFA) monitoring programs 
Load beneflt design and eligibility 
Establish pharmacy network 
Educate members 

Implement customer service functions 







KEY 


mm Timing 



11 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

As HCFA (and Congress) pursues this critical initiative for our country's seniors, there 
are several important steps. The next steps may involve: 

• Establishing objectives for the program, including the drugs covered, member cost 
sharing requirements, network access, mail pharmacy programs and customer service 
levels. Utilization management and other monitoring processes also need to be 
addressed. 

• Deciding on the pricing, and clinical programs and controls (including formularies) to 
be used. HCFA has the option to seek legislated pricing similar to that used by 
Medicaid to obtain manufacturer rebates. HCFA also has the option to either use the 
PBM's formulary and clinical services, or design its own. 

• Selecting a PBM. The selection process begins with development of an RPP to 
communicate HCFA's goals and objectives, and to provide a standard basis for 
evaluating responses. Proposal evaluation, site visits to the leading PBMs, and 
contacting references to discuss critical factors such as implementation and member 
service should follow issuance of the RFP. 

• Planning the implementation of the program, including developing processes to 
educate beneficiaries as well as enroll members, maintain eligibility and possibly 
coordinate benefits or collect premiums (functions not typically or routinely 
performed by a PBM). 

In the last 10 years, the PBM industry has grown and repositioned itself: developing 
ambitious new programs to help clients better manage drug spending and administer 
benefits. Although the industry faces its challenges, the leading PBMs are generally 
seeing improved margins and the industry is expected to continue to provide a valuable 
service. All of the leading PBMs are extremely interested in working with HCFA on this 
program, and can add great value in helping HCFA achieve its plans and objectives. 



12 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



1.0 INTRODUCTION 

The Health Care Financing Administration (HCFA) contracted PricewaterhouseCoopers 
LLP (PwC) to prepare a report on the pharmacy benefit management (PBM) industry. 
The study examines the PBM industry from the perspective of a potential client and is 
intended to help HCFA effectively respond in the event that Congress extends a drug 
benefit to Medicare. 

This study is based on PwC's consulting experience with the pharmacy benefit 
management, payer, and pharmaceutical industries, supplemented by literature reviews 
and interviews with executives from leading PBMs and large employer groups, including 
Fortune 500 companies and state governments. For ease of understanding, this report is 
organized into three defining topics: 

> 2.0: Structure Related Issues 

> 3.0: Operations Related Issues 

> 4.0: Performance Measurement 

Chapter 2 Structure Related Issues describes the issues and forces that have shaped the 
PBM industry, provides an overview of PBM operations and industry capacity, describes 
the regulatory environment, and explains how PBMs service local markets. The section 
concludes with an overview of PBM financials and pricing mechanism. 

Chapter 3 Operations Related Issues describes the administrative and clinical services 
PBMs provide and the types of contracts into which PBMs routinely enter. It includes 
explanations of the bidding, vendor evaluation, implementation, and monitoring 
processes used by clients selecting a PBM. 

Chapter 4 Performance Measurement explains the performance indicators, service 
benchmarks, and guarantees commonly used to evaluate PBMs. This section also 
includes an evaluation of the PBM industry's performance against the aforementioned 
measures, based on recent surveys. 



13 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.0 STRUCTURE RELATED ISSUES 



During the 1990s, PBMs evolved into organizations that provided an array of 
administrative and clinical services to help their clients manage drug benefits. Today, 
PBMs manage the drug benefits of approximately 70% of the United States, including 
approximately 65% of our country's seniors, in an environment of rising drug costs and 
utilization. 

PBMs operate in a competitive consolidating market constantly challenged by their 
clients and manufacturers to reduce drug costs and utilization, and to influence the drug 
selection by patients, doctors, and pharmacists. Moreover, its' operations and contractual 
relationships are subject to federal and state regulations. 

PBMs service a complex system that includes pharmacies, manufacturers, clients, 
physicians, and members. Most PBM operations are highly automated and not especially 
sensitive to significant increases in volume. As a result, the leading PBMs believe the 
industry could quickly respond to accommodate a Medicare drug benefit. 

PBMs maintain national pharmacy networks to provide members with access to drugs, 
and derive revenue from clients and manufacturers. 

This section describes the issues and forces that have shaped the PBM industry, provides 
an overview of PBM operations and industry capacity, describes the regulatory 
environment, and explains how PBMs service local markets. The section concludes with 
an overview of the financials and pricing that underlie PBMs. 



14 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.1 Industry Structure Overview 

In the last 10 years, the PBM industry has repositioned and is developing ambitious new 
programs to help clients better manage drug spending. During this time, a group of 
leading PBMs has emerged to dominate the industry. This group includes AdvancePCS,. 
Caremark Rx, Inc., Express Scripts Inc., and Merck-Medco Managed Care, L.L.C. 

Drug costs are rising faster than inflation, and have become a large percentage of the 
overall healthcare spending. Increasing drug costs can be attributed to a number of 
factors, which include increased drug utilization, the growth in the number of new, more 
expensive drugs, and advances in science and medicine. 

The rise in overall healthcare cost, and in particular drug cost, have political and 
regulatory implications. Given their role in the pharmacy and healthcare industries, 
PBMs are subject to myriad federal and state regulations and laws. These laws often 
overlap in scope, and in many instances have yet been tested in the courts. Presently, 
legislation concerning patient privacy and rights - whose impact on PBMs is unclear - 
has become a concern of the industry. 

Besides the political and regulatory realities, the major forces shaping the industry today 
include consolidation, the struggle to maintain rebates, increased pressure to more 
effectively manage drug costs in a time of rising drug prices, and responding to increased 
regulations. 

This section describes the evolution and dynamics driving the industry, macro trends in 
drug spending and utilization, profiles of the leading PBMs, the major challenges to the 
stability of the industry, and the regulatory environment governing PBMs. 



15 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.1.1 Structural Evolution and Market Dynamics Driving the PBM Industry 

PBMs work with their clients to administer drug benefits and control costs. As part of 
their service, PBMs secure substantial discounts from retail pharmacies and rebates from 
drug manufacturers; they offer their clients a highly automated claims-processing 
environment. Moreover, 99% of all pharmacy claims are electronically adjudicated at the 
point of service (POS), i.e., at the pharmacy where the drug is dispensed. 



PBMs establish and maintain large pharmacy networks with chain and independent 
pharmacies, from which drugs are dispensed to members. These networks include retail 
pharmacies, mail pharmacies for chronic drugs, and in some cases specialty pharmacies 
for high cost specialty drugs (e.g., HIV and organ transplant medications). Pharmacies 
contract with PBMs and agree to discount their pricing to gain access to PBM members. 

PBMs contract with manufacturers of branded drugs to receive rebates and administrative 
fees. Manufacturers typically pay these rebates for increases in market share and/or 
utilization. PBMs may also receive additional rebates for administering certain disease- 
management or counter-detailing programs that are not tied to specific branded drugs, 
and/or money or non-cash benefits. It is common for PBMs to retain the administrative 
fees, and share the rebates with their clients. PBMs that operate mail pharmacies may 
receive extra rebates or better pricing for specific drugs purchased through those 
pharmacies.' 



' "Report to the President on Prescription Drug Coverage, Spending, Utilization and Price," Office of Health Policy 
with the Office of the Assistant Secretary of Planning and Evaluation, April 2000. 



Diagram 2: PBM Value Chain 




i 




16 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

PBM Clients and Services 

PBM clients include HMOs (35%), employer groups (33%), and insurers (21%)). In 
addition, PBMs provide services for other clients (1 1%) such as "consumer cards" for the 
uninsured (Diagram 3). Employer groups include corporations, state and local 
government, trade unions, and others. Insurers include commercial health insurers and 
Blue Cross/Blue Shield clients. Other clients are predominantly consumer card clients 
such as consumer organizations or associations like AARP. These programs offer a 
pharmacy discount whereby members pay the cost of drug minus a contracted percentage 
off retail prices (typically 5 to 10%). ^ 

Diagram 3: PBM Client Profile, 1998 



Other 
11% 




Employer Groups 

33% 



PBMs may provide administrative services, clinical services, or both types of services to 
their clients, and may manage the retail pharmacy, mail pharmacy, or "integrated" (mail 
and retail) benefit. Administrative services include client service, pharmacy network 
administration, mail pharmacy, claims adjudication, member services, and manufacturer 
contracting and rebate administration. Clinical services range from formulary 
management to sophisticated disease management programs. 

In general, self-insured employers and insurance carriers outsource both administrative 
and clinical services to a PBM. Managed care organizations (MCOs) (e., g., health plans) 
and some insurers may elect to retain formulary and clinical control, including 



' Scott, Miriam Basch, "Rx trends: Market shows strong growth rate; makers consolidate, PBMs emphasize 
managed care," Employee Benefit Plan Review, April 1, 1998. 



17 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

manufacturer contracting, and outsource only administrative services such as claims 
processing and benefit administration to a PBM. 

It is noteworthy that several large insurers and MCOs, such as Foundation Health 
Systems, Oxford Health Plan, and BCBS of California, have recently outsourced the 
administration of their drug benefits to PBMs, but retained formulary and clinical control. 
These insurers are attempting to reduce cost by taking advantage of lower claims 
processing and other administrative fees. 

PBM services revolve around the drug benefit designed by the client. The benefit design 
determines the therapeutic categories that are covered —including whether cosmetic, 
lifestyle, and over-the-counter (OTC) drugs are reimbursed, and the extent to which 
generics and formulary drugs are mandated. As a part of the drug benefit, a co-pay 
structure is developed which determines the cost sharing between the client of a PBM and 
the individual members of healthcare programs. PBMs use co-pays as a mechanism to 
shift some responsibility of utilization to the member by making them sensitive to the 
cost of their utilization.^ Co-pays are also used to provide incentives to encourage the use 
of generics or formulary drugs. 

PBMs use formularies to encourage the use of specific branded (and generic) drugs, 
which are typically the basis for rebates (and administration fees) paid by manufacturers. 
Rebates typically represent a discount of 5 to 15% of a drug's cost and administration 
fees an additional 1 to 3%. 

Formulary management services allow a client to use the PBM's formulary and share 
manufacturer rebates. A formulary is an approved list of branded (and generic) drugs 
developed by the PBM, or the client. In general, employers and insurers have the least 
restrictive drug programs and will use a PBM's formulary, while MCOs have the most 
restrictive formularies and are more likely to develop their own list of approved drugs. 
Manufacturers pay rebates to have their drugs listed on formularies. Drug formularies can 
be open, incented, or closed. 

• An open formulary is a list of recommended drugs. Under this structure, most drugs 
are reimbursed irrespective of formulary status. However, the client's plan design 
may exclude certain drugs (e.g., OTC, cosmetic and lifestyle drugs). Physicians, 
pharmacists, and members are encouraged by PBMs via mailings, electronic 
messaging, and other means to prescribe and dispense formulary drugs. 



' Kreling, David, "Cost Control for Prescription Drug Program: Pharmacy Benefit Manager (PBM) Efforts, Effects, 
and Implications," August 2000. This was a background paper prepared for the Department of Health and Human 
Services' Conference on Pharmaceutical Pricing Practices, Utilization and Costs. 



18 



82001, PricewaterhouseCoopers LLP 



1 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• An incented formulary applies differential co-pays or other financial incentives to 
influence patients to use, pharmacists to dispense, and physicians to write 
prescriptions for formulary products. 

• A closed formulary limits reimbursement to those drugs listed on the formulary. Non- 
formulary drugs are reimbursed if the drugs are determined to be medically necessary, 
and the member has received prior authorization. 

In addition to formulary management, PBMs offer their clients other clinical services. 
These programs often include a shared savings arrangement between the PBM and the 
client. These services include disease management, utilization management programs 
such as drug utilization review (concurrent and retrospective), and prior authorization, as 
well as brand and generic therapeutic substitution programs. In some cases, HMOs 
seeking greater clinical control may develop additional programs 

Evolution of PBMs 

The PBM industry began when managed care principles, such as co-pays and provider 
networks were applied to the pharmacy benefit in an effort to control costs. Growth in the 
industry was driven by manufacturer rebates, manufacturer acquisition of PBMs, and 
self-insured employers seeking to reduce drug costs. Recently, the industry has focused 
on clinical services and consolidation in an effort to improve margins, as well as 
negotiating power with retail pharmacies and manufacturers. The evolution of the PBM 
industry can be categorized into four major phases, which are summarized below. 

■ Phase I: Inception (1980 - 1990) - Beginnings of the PBM industry as managed care 
organizations carved out the pharmacy benefit, and mail service and claims 
processing companies emerge; 

■ Phase II: Dramatic Growth (1990 - 1994) - Rapid growth in enrollment of managed 
care clients, penetration of the employer segment, emergence of rebates, and 
manufacturer acquisitions of PBMs; 

■ Phase III: Scrutiny and Saturation (1994 - 1998) - Manufacturers divest PBM 
operations, rebates begin to diminish, and a large percent of the privately insured 
population contracts with PBMs; 

■ Phase IV: Consolidation and Repositioning (1998 - Today) - Industry consolidates to 
improve margins and market power and to realize economies of scale, while facing 
increased pressure to manage client's drug spending and comply with new 
regulations. 



19 



f'2001 . PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

The active stakeholders and trends that emerged in one phase of evolution often 
overlapped with the next phase because of the significant transition in this market. 

Phase I: Inception (1980—1990) 

The PBM industry originated as a result of several developments occurring throughout 
the 1980s. These developments included managed care organizations that "carved-out" 
the pharmacy benefit, and companies that provided mail-pharmacy or claims-processing 
services. 

In the 1980s, in an effort to control costs, managed care organizations split out specific 
benefits such as pharmacy, mental health, and dental from their overall medical benefit. 
Coupled with electronic claims adjudication to reduce claims processing costs, MCOs 
applied managed care principles, such as co-pays and provider networks, to the pharmacy 
benefits. This represented a significant shift from the previous administration of the 
pharmacy benefit under indemnity insurance. With indemnity insurance, the member paid 
the fiill cost of the prescriptions, and then submitted a paper claim to their insurer for 
reimbursement. Indemnity plans typically covered 80% of prescription costs over a set 
deductible. 

The new managed care pharmacy carve-outs became some of the early PBMs. For 
example. United Healthcare created Diversified Pharmaceutical Services (DPS), and New 
York Life created Express Scripts Incorporated. These PBMs managed the drug benefits 
for the insurers managed care plans. Initial PBM savings were realized through 
administrative cost savings via electronic claims adjudication and negotiated discounts in 
pharmacy networks. Also, clinical services were beginning, generally focused on 
promoting generics. 

As managed care organizations began using PBMs, several companies emerged that 
offered electronic claims processing, networks discounts, and mail services to help 
control the cost of drugs and improve member convenience. These companies included 
Caremark and Medco. At the time it was formed, Caremark primarily serviced Baxter 
Healthcare Corporation's employees. 

Another leading PBM that emerged at this time to provide pharmacy benefit services was 
PCS. PCS began as a claims processor serving self-insured employers, and also offered 
network discounts and electronic adjudication. 



20 



©2001, PncewaterhouseCoopers LLP 



1 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Phase II: Dramatic Growth (1990—1994) 

During this period, the PBM industry experienced significant growth, culminating with 
the acquisition of several leading PBMs (Medco, DPS, and PCS) by pharmaceutical 
manufacturers. This growth was partly fueled by the introduction of formulary rebates. 
(A formulary is an approved list of both branded and generic drugs developed by the 
PBM or the client of a PBM.) 

In the early part of this phase, a few manufacturers began to pay rebates for access to the 
formularies utilized by the managed care organizations. These manufacturers generally 
paid rebates out of fear that they would lose access to the individuals (commonly referred 
to as lives) within the MCOs. As managed care organization and PBMs became more 
prominent, more manufacturers began to aggressively offer rebates to these managed care 
entities. In addition, the impetus of the Clinton Health Care Reform Proposal fueled 
manufacturer concerns over the influence of managed care. This proposal encouraged and 
would have accelerated the use of managed care, particularly among employer groups, 
and probably served to drive their acceptance of employer plans for rebates. 

As PBMs gained experience using rebates to attract managed care organizations, they 
decided to expand their efforts and target the vastly untapped self-insured employer 
market. During this time, much of the employer market population was still under 
indemnity insurance plans. While PBMs were already providing claims-processing 
services to many of these employers, they weren't managing the employee lives through 
a formulary. Diversified Pharmaceutical Services (DPS) made the initial strategic move 
by encouraging manufacturers to participate in a National Drug Formulary designed 
specifically for self-insured employers.'* At the same time, PCS combined with Clinical 
Pharmacy Advantage and was able to offer a proven formulary to their existing self- 
insured clients. Large mail-order pharmacies such as Medco and Caremark developed 
formulary programs to achieve savings for their clients. 

Using pharmacy discounts and manufacturer rebates as an incentive, PBMs demonstrated 
to employers the savings generated from a managed drug program: Manufacturers began 
to pay rebates for the self-insured employer claims covered by PBMs. As pharmacy 
discounts and manufacturer rebates increased, PBMs demonstrated to employers that the 
savings generated from a managed program would more than outweigh the additional 
claims volume that would result from elimination of the "shoe-box" effect. The "shoe- 
box" effect refers to the increase in pharmacy costs that results when online adjudication, 
under which all covered claims are reimbursed by the payer, replaces paper claims. Paper 



^ Decision Resource, "PBMs in the Managed Care Marketplace: An HMO Perspective," Spectrum Pharmaceutical 
Industry Dynamics (October IS, 1994). 



21 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



claims not submitted by the patient were said to be in the "shoe-box," with the cost of 
these drugs paid by the patient, not the payer of the drug benefit. 

The PBMs success with employers result for several key reasons: 

• First, employer groups were generally less sophisticated than HMOs and insurance 
carriers on the topics of healthcare benefits and rebates. In later phases, this would 
change as employer groups hired the services of benefits consultants to advise them 
on contracting with PBMs.^ 

• Second, PBMs demonstrated a real value to the employer groups illustrating for them 
that network discounts and formulary rebates would more than offset the "shoe-box" 
effect ^ 

• Third, PBMs showed impeccable timing as healthcare benefit costs for employers 
were spiraling out of control and garnering serious attention from the senior 
management of most employers. Moreover, the application of accrual accounting to 
retiree medical benefits added to such concerns. Many employers recognized that 
some action was needed and made the decision to empower PBMs to manage the 
pharmacy benefit.'^ Enlisting the services of a PBM appeared to be a good start and an 
easy decision for most employers. 

The PBMs experienced substantial increases in the number of lives they covered as a 
result of at least two important factors: enrollment increases in MCOs coupled with the 
PBMs own ability to extend services into the self-insured employer market. 

Manufacturer acquisitions of PBMs represented another major force behind the life 
growth. Such acquisitions of PBMs were a logical extension and natural evolution of the 
defensive posture manufacturers had taken in paying rebates to ensure access to the lives 
managed by PBMs. From 1993 to 1994, three manufacturers acquired PBMs for 
substantial premiums over market value (several billion dollars each), and many other 
manufacturers entered into expanded alliances with PBMs in order to remain competitive 
(see Table 1). These actions were at least partly prompted by the proposal of healthcare 
reform under the Clinton Administration. If healthcare reform was to be a reality, 
manufacturers would need to have access to formulary managed lives. 



^ "Get the Most Out of Your PBM," Business & Health 12 No. 1 1 (November 1994); 37. 
' Ibid., 37 

^ Coopers & Lybrand, Appendix B, Summary of Employer Rebate Experiences 1993-1995, Chicago: Coopers & 
Lybrand 1996. 



22 



B2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 2: Key Manufacturer PBM Acquisitions and Alliances (1993-1994) 



Manufacturers Acquire PBMs 


Manufacturers Ally with PBMs 


■ Merck-Medco; July 1993; $6.6 billion 

■ SKB-DPS; May 1994; $2.3 billion 

■ Lilly-PCS; July 1 994; $4.0 billion 


■ Caremark Drug Alliance Program; 
Spring 1994; Pfizer, BMS, RPR, Lilly 

■ ValueHealth-Pfizer Joint Venture; May 
1994; $50 million each 



Manufacturers hoped to realize two additional benefits: access to utilization data, and an 
opportunity to move closer to their real customers — the patients taking their drugs and 
the organizations paying for them. Among other things, manufacturers were interested in 
understanding the profiles of patients taking their drugs, as well as their concomitant 
medications, dosing regimes, and physician prescribing patterns. Collection of such data, 
along with access to formularies, would enable manufacturers to optimize the strategic 
positioning of their products.^ ^ 

The number of lives that PBMs covered drove up the premium paid by the 
manufacturers. Manufacturers acquired PBMs at a cost of $80 to $175 per covered life, 
(while PBMs acquired each other at a cost of $22 to $34 per covered). This fueled more 
growth as PBMs took on unprofitable business and lives from the uninsured population. 

In an effort to gamer additional lives and become an attractive acquisition candidate, 
PBMs lowered their claims processing fees and rebate retention rates, and began to take 
on unprofitable business. Regarding its management of a large employer (Ford Motor 
Company), Value Health commented in 1994: " We nursed that account along, because 
of course if a pharmaceutical manufacturer wanted to pay us for the asset value of that 
account, if you will, it was worth continuing."" 

One technique used to drive growth in lives and acquisition values was to include the 
uninsured segment of the population; i.e., the cash-paying customer. PBMs signed on 
these unfunded lives through consumer card programs. These programs essentially 
offered small discounts on certain formulary products to patients at the point of service, 
to encourage the use of formulary products. At the time, manufacturers were not 



Decision Resource, "PBMs in the Managed Care Marketplace: An HMO Perspective," Spectrum Pharmaceutical 
Industry Dynamics. (October 28, 1994) 

Financial Times/Coopers & Lybrand, "Adapting an Innovative Product/Service Strategy to a Geographically 
Varied Market Positioning," paper read at the World Pharmaceuticals Conference, March 1995. 

Financial Times/Coopers & Lybrand, "Healthcare Data — Getting the New Currency that Drives Strategy and 
Success," paper read at the World Pharmaceuticals Conference, March 1995. 

" "Value Health Seeking "Significant Rate Increase' From Captitated Ford Contract; Decision Not to Sell PBM Due 
to Decreased Vertical Integration Interest." FDC Reports December 5, 1994, 



23 ©2001 , PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

especially discriminating about the quality of a PBM's clientele. These unfunded lives 
added to the PBM's overall value. 

These trends increased the sales volume throughout the formulary management business. 
With few barriers to entry and manufacturer rebates as a new revenue source, more 
PBMs entered the market. This larger number of PBMs were now covering substantially 
more lives and generating record numbers of rebatable claims. 

Rebate payments however were reaching record levels, attracting the attention of senior 
management at pharmaceutical manufacturers. By the end of this phase of growth, most 
manufacturers began to conclude that paying rebates for access to formularies did not add 
value to their financial statements. Manufacturers, including those who purchased PBMs, 
began to realize that their sales volume through PBMs were increasing primarily because 
of the life growth in the PBMs customer base, and that in most cases the PBMs were 
unable to influence the brand of drugs dispensed to their open formulary clients. 

Phase III: Scrutiny and Saturation (1994 — 1998) 

By 1994, the PBM business began to mature, and manufacturers were generally not 
recognizing the anticipated value from their contracting practices, despite the dramatic 
increases in total rebate payments. At the same time, pricing litigation placed 
manufacturers under scrutiny and caused them to become more discerning about 
conditions under which rebates would be paid. As a result, manufacturers made a 
fundamental change in their approach to contracting with PBMs. In general, rebate- 
pricing criteria were changed so that PBMs would have to deliver increases in market 
share before all or most of the rebate would be paid. 

Manufacturers also began to exercise their right to audit PBMs and exclude certain plans 
from rebate eligibility. By 1995, all of these changes represented a fundamental shift in 
manufacturer philosophy regarding formulary management programs, causing a 
precipitous decline in the average rebate paid per claim, and the number of claims on 
which rebates were paid. Partly as a result of their better understanding of PBMs, SKB 
and Lilly divested their PBM operations (DPS and PCS, respectively) for significantly 
less than they were acquired. 

In response to these trends, PBMs introduced expanded services that differentiated them 
as clinical managers as well as pharmaceutical cost managers. Increased use of restrictive 
formularies and the addition of intervention programs offered tools for PBMs to better 
influence the products dispensed to their members. As a result, PBMs were partially able 
to restore rebate revenues and continue to share them with their clients. In addition, 
PBMs began to scrutinize their unprofitable clients, and either increased their fees, 



24 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



changed the rebate allocation, or exited the relationship. Claims processing fees 
increased, although not to the level that had historically existed. 

During this period, the PBM market became saturated as a very large percentage of the 
privately insured population used PBMs or other third-party payers to administer their 
pharmacy benefits. By 1998, approximately 65% of all retail drug purchases were 
administered through PBMs or other third party administrators at the point of sale; this is 
up from 49% in 1995 and 30%) in 1992 (Diagram 4). During this same period. Medicaid 
payments for drug purchases remained stable.'^ 

Diagram 4: Payment Source of Retail Drug Purchases (at point of sale), 1992-1998 




1992 1993 1994 1995 1996 1997 1998 



■ Medicaid □PBM 



IMS Health Retail Method-of- Payment Report^^, 1999. Based on data from Hoechst Marion Roussel (1998), 
approximately 92% of HMOs and 78% of PPOs use a PBM to administer their drug benefit. Thus, it assumed that a 
large percentage of the growth in third party payers is attributed to the growth of PBMs. 



25 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Phase IV: Consolidation and Repositioning (1998 — Today) 

The major forces shaping the industry today include industry consoHdation, the struggle 
to maintain rebates, increased pressure to more effectively manage drug costs in a time of 
rising drug prices, and responding to increased regulations. 

Partly as a result of consolidation, a group of leading PBMs has emerged to dominate the 
industry. These include AdvancePCS, Caremark Rx, Inc., Express Scripts Inc., and 
Merck-Medco Managed Care, L.L.C. The PBM industry is consolidating in an effort to 
realize economies of scale and as a means to increase market power and negotiating 
strength with manufacturers and network pharmacies. 

The PBM industry has repositioned itself beyond administrative services, and is 
developing ambitious new programs to help clients better manage drug spending. These 
include plan designs that provide incentives for the use of less expensive, preferred 
medications and clinical programs that reduce cost, encourage appropriate utilization, and 
improve patient care. 

PBMs are also facing proposed regulations, such as those mandated by the Health 
Insurance Portability and Accountability Act of 1996 (HIPAA), which could hinder their 
ability to help clients manage drug cost by restricting the use of patient and prescriber 
data. Complying with these regulations could also be costly, as systems and business 
processes are modified. 

The challenges facing the PBM industry will be discussed in Section 2.1.4 (Industry 
Stability and Major Challenges Facing the PBM Market). 



26 



C200I, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2A.2 Macro Trends in Drug Spending and Utilization 
Drug Cost Trends 

Drug costs are rising faster than inflation, and becoming a large percentage of the overall 
healthcare spend. By 2010, it is expected that drug expenditures will be approximately 
13.8% of national health expenditures, up from 6.10% in 1995 and 8.2% in 1999 



(Diagram 5). 



a 

O. 

X 



es 
w 

X 

a 

a 

'•C 
es 
Z 



u 
u 
u 
Oh 



16.00% 



14.00% 



12.00% 



10.00% 



8.00% 



6.00% 



4.00% 



Diagram 5: Drug Expenditures as a Percent of National 
Health Expenditures 




1995 1996 1997 1998 1999 2000 2002 2010 



Heffler, Stephen, et al., "Health Spending Growth up in 1999; Faster Growth Expected in the Future" Health 
Affairs20, no. 2, (March/ April 2001): 194. 



27 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



The cost of drugs over the next eight years is expected to rise between 10—15% per year. 
By 2008, national expenditure on drugs is expected to be $243 billion, up from $61 
billion in 1995, a 299% increase (Diagram 6).''* On a per capita basis, drug costs are 
estimated to increase to $800 per year by 2008, an increase of 257% from 1995 (Diagram 




1995 1996 1997 1998 2003 2008 



Diagram 7: Projected U.S. Per Capita Drug Expenditures 



(/I 




1995 1997 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 



'■* National Health Statistics Group, Office of the Actuary, HCFA: National Health Accounts. 
Ibid. 



28 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Rising drug costs can be attributed to a number of factors, which include increased drug 
utihzation, the growth in the number of new, more expensive drugs, and advances in 
science and medicine. 



Increased utilization by patients of all ages is contributing to rising drug costs. Since 
1992, drug utilization (unadjusted for changes in population) has increased 52% from 
approximately 2 billion prescriptions dispensed per year to an estimated 3.15 billion in 
2000.'^ It is estimated that nearly 4.0 billion prescriptions will be dispensed by 2004 
(Diagram 8). It is generally accepted that seniors need more prescription drugs, and this 
population is expected to contribute disproportionately to rising utilization, especially as 
the Baby Boomers near retirement age. 

Diagram 8: Total Prescriptions Dispensed, 1992-1999 and 
Estimated 2000 and 2004 

e 

I 4,500 
1 

c 4,000 

1 3,500 
s 
a> 

3,000 

Q 

1 2,500 
■5 2,000 
i 1,500 

1992 1993 1994 1995 1996 1997 1998 1999 2000 2004* 




IMS and National Association of Chain Drug Stores (NACDS) Economics Department. 2000 and 2004 estimates 
are from NACDS. 



29 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Seniors account for approximately 13% of the total population, but account for over one- 
third of the nation's drug expenditures.'^ The typical Medicare beneficiary (over the age 
of 65) spends $516 per year on drugs, which is 235% greater than individuals under 65 

1 8 

years of age, who spend approximately $ 1 54 per year (Diagram 9). Recent survey data 
reported that 80%) of retired persons take a prescribed drug every day, and the average 
Medicare beneficiary used 19.6 prescriptions in 1996.'^ 

Diagram 9: Drug Expenditures by Age Group and 
Income, 1997-1998 



^ $600 

6^ 



k $500 



a 
n 
U 
u 



$400 



$300 



■o 
c 

a. 

u 

3 



$200 



$100 





IT) 










\o 


o 




o 






u 


o 


HJ 


o 




ICOI 


00 






o 


ao 


« 




m 


o' 


03 














de 


55 


de 




de 


< 


c 


V 


c 


A 


c 


D 






3 



O 00 

y < 



< 6 



o 
o 
o 



00 

< 



o 
o 
o 
o' 

A 



00 

< 



> 
O 



"Medicare Fact Sheet," The Henry J. Kaiser Family Foundation, March 2000. 

Report to the President on Prescription Drug Coverage. Spending. Utilization and Price, Office of the Assistant 
Secretary for Planning and Evaluation, Department of Health and Human Services. Data source is the Bureau of 
Labor Statistics, Consumer Expenditure Survey Data as analyzed by the Office of the Actuary, HCFA. 
" Davis, Margaret, et a!., "Prescription Drug Coverage, Utilization and Spending Among Medicare Beneficiaries," 
Health AffairslS, no. 1, (January/February 1999): 237. 



30 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



New more expensive drugs are being introduced and taking market share from drugs that 
are coming off patent and being replaced by less expensive generics. In 1999, drugs 
introduced since 1992 represented 25.4% of all drugs prescribed in 1999 and 40.8% of 
the drug costs (Diagram 10).^^ However, it is expected that the impact of new drugs on 
overall drug costs will be partially offset by the expiration of patents on branded 
products, allowing the use of less expensive generics. This represents a loss of 
approximately $30 billion in revenues to pharmaceutical companies.^' 



Diagram 10: Impact of New Drugs Introduced Since 1992 
on Drug Utilization and Cost 



o 

U 

■o 
c 
n 
e 

I 

01 
3 



C 

O 

w 
n 
a. 

E 



a. 



120.0% 
100.0% 
80.0% 
60.0% 
40.0% 
20.0% 
0.0% 







r ■;. : ., . ';| 

\ " . ' . A 

25.4".i 




40.S".1 
















IB 













%)Rxs 



% Cost 



'New Drugs (since 1992) ^Existing Drugs 



A recent study published in Health Affairs identified two underlying drivers of increasing 
drug cost that go beyond price and utilization. The study proposes that new science and 
better medical practice have contributed significantly to increases in drug costs. As a 
result, the number of patients diagnosed and undergoing treatment is increasing at the 
same time the efficacy of treatment is improving. For example, advances in the treatment 
of AIDS patients have dramatically increased their life expectancy. 



"° 1999 Drug Trend Report, Express Scripts, June 2000 

Mullin, Daniel, et al., "Projections of Drug Approvals, Patent Expirations and Generic Entry 2000 to 2004," 
Prepared for U.S. Department of Health and Human Services' Conference on Pharmaceutical Pricing Practices, 
Utilization and Costs. 

" Dubois, Robert, et al, "Explaining Drug Spending Trends: Does perception match reality?," Health Affairs 19, no. 
2 (March 1, 2000): 231-239. 



31 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Medicare Trends 

As of 2000, approximately 66% of Medicare beneficiaries had some form of drug 
coverage through employer sponsored health plans such as Medicaid, Medicare HMOs, 
or Medigap insurance (Diagram 12)^^, down from 1998 when 73% of seniors had drug 
coverage (Diagram 1 1).^"* The trend is due in large part to employers reducing or 
eliminating pharmacy benefits for retirees. 

Diagram 11: Drug Coverage of Medicare Beneficiaries, 1998 



Other 
3% 




Employer 
Sponsored 
33% 



■ Kaiser Commission on Medicaid and the Uninsured. Data Source: Actuanal Research Corporation projections, 
based on 1998 Medicare Current Beneficiary Survey. 

Poisal, John and Lauren Murray, "Growing Differences Between Medicare Beneficianes with and without Drug 
Coverage," Health Affairs 20, no. 2 (March/ April 2000): 77. Data based on the 1998 Medicare Current Beneficiary 
Survey. 



32 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 12: Drug Coverage of Medicare Beneficiaries, 2000 




Other 

5% 



Medicare HMO 

17% 



No Coverage 



34% 



Medigap 



8% 



Medicaid 
12% 



Employer 
Sponsored 



24% 



In some cases the Medicare beneficiary received a partial drug benefit. For example, 
Medigap coverage is limited (only three of ten Medigap plans offer a prescription drug 
benefit), and requires significant cost sharing with the beneficiary. These plans require 
the beneficiary to pay 100% up to a $250 deductible and then 50% of the cost up to a 
maximum benefit typically between $1,250-53,000. Nearly 25% of those receiving 
Medigap coverage received it for only part of the year. Also, while approximately one- 
half of U.S. states offer indigent seniors programs, the programs do not cover all drugs, 
and service only a small percentage of the total senior population that lacks coverage. 



33 




I 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Medicare beneficiaries without drug coverage utilize fewer prescriptions per year, and 
have higher out-of-pocket expenditures than beneficiaries with drug coverage. Seniors 
without drug coverage average 16 prescriptions per year while those with coverage 
average 21.1 per year. Non-seniors with insurance averaged 6.8 prescriptions per year 
and 2.0 for those individuals without insurance coverage (Diagram 13).^^ 



Diagram 13: Annual Drug Utilization for Medicare and Non- 
Medicare Individuals, 1996 




Insurance Drug Coverage No Insurance Drug Coverage 



'Medicare ^Non-Medicare 



Ibid. 



34 



©2001 , PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.1.3 PBM Profiles and Landscapes 

The PBM market is led by AdvancePCS, Caremark Rx, Inc. (Caremark), Express Scnpts 
Inc. (Express Scripts), and Merck-Medco Managed Care, L.L.C. (Merck-Medco), with the 
remainder of the market split between smaller PBMs such as, Prescription Solutions, 
insurer owned PBMs such as, Wellpoint, and PBMs operated by retail chains such as 
Walgreens Health Initiatives, (Table 3). 

It is estimated that the top four PBMs control 195 million covered lives, more than half 
the population of the United States. The total number of reported covered lives by PBMs 
(400,000,000) significantly exceeds the total population of the U.S, primarily because of 
double counting. For example, a state government with 3 million members may contract 
with one PBM for retail services and another PBM to provide mail service. In this case, 
both PBMs count the same 3 million members. 

Table 3: PBM Market Segments 



Segment 


Description 


PBM 


Covered Lives 


Tier 1 


> 20 million covered lives. 


AdvancePCS 


68,000,000 






Merck-Medco 


65,000,000^^ 






Express Script 


42,000,000 






Caremark Rx 


20,000,000 


Tier 2 and 


Smaller PBMs and those 


New Eckerd Health 


16,000,000 


Retail 


owned by retail chains 


Services 








Prescription Solutions 


5,000,000 






Restat 


2,000,000 






Walgreens Health 


2,000,000 






Initiatives 




Captives 


Insurer-owned PBMs. 


Wellpoint 


15,003,377^' 






Aetna 


4,800,000 


Other 


Other PBMs 




160,196,623 






Total 


400,000,000^^ 



The top four PBMs (in terms of covered lives) each manage greater than 20 million 
covered lives, own mail pharmacies, and have extensive retail pharmacy networks with 
national coverage. PBMs are low margin companies with the leading PBMs operating at 



Includes 10.5 million covered lives from United Healthcare. 

Namovic-Peat, Susan, HMO& PBM Strategies for Pharmacy Benefits( Atlantic Information Services (AIS), 
1999): 78. Reflects 1998 membership total. 
Ibid., p. 120. 



35 



g200I, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

a profit margin of less than 5.0% (Table 4)^*^ . However, over the last couple of years, 
PBMs, through increased clinical and formulary control, are seeing their margins 
increase. 



Table 4: Profile of Top Four PBMs 



AdvancePCS 


Merck-Medco 


Express Scripts 


Caremark 


Covered Lives 


• 68 million 


• 65 million 


• 42 million 


• 20 million 


Claims 
Processed 


• 450 million 


• 500 

■11- 30 

mi ion 


• 260 million 


• 70 million 


Mail Claims 
Processed 


• 10 million 


• 61 million 


• 15 million 


• 14 million 


Number of 
Mail 

Pharmacies 


• Three (3) 


• Thirteen 
(13) 


• Five (5) 


• Three (3) 


Number of 

Retail 

Pharmacies 


• 57,000 


• 57,000 


• 56,000 


• 54,000 


Internet 
Pharmacy 


• Yes 


• Yes 


• Yes 


• Yes 


Geographic 
Market 


• National 


• National 


• National 


• National 


Ownership 


• Independent 


• Merck 


• Independent 


• Independent 


Other Alliances 


• Drugstore.com 

• Consumer 
Health 
Interactive 


• CVS 

Procare 


• PlanetRx.com 


• CTS 


Market 

Capitalization^' 


1,192,000,000 


• N/A 


2,893,000,000 


2,340,000,000 



Data obtained from Dow Jones Interactive. Profit margin and revenue reflect most recent 12-month period as of 
October 31, 2000. 

Latanich, Terry, "Issues in Managing Prescription Drug Benefits for Retirees-The PBM Perspective," November 
20, 2000. Paper read at Issues in Managing Prescription Drug Benefits for Retirees Conference. Estimate based on 
company reported data for 2001. 

^' Market capitalization data reflects most recent reported data (varies by company), typically 3'^'' Quarter 2000 
numbers. 



36 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.1.4 Industry Stability and Major Challenges Facing the PBM Market 

As mentioned previously, the major challenges shaping the PBM industry today include 
industry consolidation, the struggle to maintain rebates, increased pressure to more 
effectively manage drug cost in a time of rising drug prices, and responding to increased 
regulations. 

The pharmacy benefit management industry has undergone consolidation as the leading 
PBMs seek economies of scale and an increase in their negotiating power with retail 
pharmacies and manufacturers. Currently, the top four PBMs manage the drug benefits 
for approximately 70% of the United States population. Recent examples of consolidation 
activity include the following: 

• In 2000, Rite Aid sold PCS Health Systems to Advanced Paradigm, forming the 
largest PBM in the U.S., AdvancePCS (68 million lives); 

• Express Scripts, Inc. grew from the sixth largest PBM to the third in 1999 with the 
acquisitions of ValueRX and Diversified Pharmaceutical Services (DPS); 

• Merck-Medco has routinely acquired small PBMs such as Systemed in 1996 and 
Provantage in 2000; and 

• Over the past few years, Caremark has shed its affiliation with MedPartners and has 
announced its intent to purchase several smaller PBMs. 

The rest of the PBM market (approximately 100 companies), composed of insurer-owned 
PBMs, retail network-owned PBMs, and small independents, continues to compete for 
the remaining 30% of available covered lives. Although most of these "other PBMs" 
maintain national retail networks, they tend to focus on smaller or regional clients. 
Consolidation and acquisition activity among these smaller, privately held PBMs is not 
well reported in the trade publications and is not perceived to be a driving force in the 
industry. 

While continued market consolidation is a concern for the PBM industry, it is believed 
that in addition to the potential of lowering administrative costs, a consolidated market 
should enhance the presence and market power of the remaining PBMs with respect to 
retail pharmacies and manufacturers. The concentration of market share should give the 
PBMs more leverage with retail pharmacies in negotiating discounts, and to negotiate 



Albertson, David, "Express Scripts - ValueRx Deal a Strong Declaration of Independents," Employee Benefit 
News. 



37 



02001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

better rebates with manufacturers. From the perspective of cHents and members, 
consoHdation has had minimal impact, and looks more like a change in service provider 
(e.g. new cards issued). 

As previously discussed, manufacturers have been requiring more performance from 
PBMs in order to receive rebates. In response to this, PBMs continue to offer more 
restrictive formularies and intervention programs to their clients to move market share to 
preferred branded products and generics. With the exception of HMOs and some 
employer groups, most clients have historically been adverse to moving their members to 
more restrictive drug benefit plans (e.g. closed plans) for fear of alienating their members 
and physicians. 

Over the next five years, PBMs will have to manage a significant change in the drug 
market: the so-called "blockbuster" (i.e. greater than $1 billion in annual revenue) drugs 
that are rebated are expected to lose (or have lost) their patent protection, and will be 
replaced by a new generation of drugs. 

The existing blockbuster drugs comprise a significant percentage of current PBM rebates, 
and include Lipitor, Prozac, and Pravachol. Between 1998 and 2004, it is expected that 
approximately $30 billion in manufacturer revenue will be lost from branded products 
losing their patent protection (Diagram 14). As these products lose their patent 
protection, PBMs will likely lose rebates as their clients use generics, or manufacturers 
eliminate rebates for these products. 



"Industry Consolidation," PBM News 5, no. 3 (Fall 2000): www.pbmi.com 

Mullin, Daniel, et al, " Projections of Drug Approvals, Patent Expirations, and Generic Entry 2000 to 2004." 
Prepared for U.S. Department of Health and Human Services' Conference on Pharamaceutical Pricing Practices, 
Utilization and Costs. 



38 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 14: Value of Drug Patent Expirations (by year) 



$8.0 




$- ' 

1998 1999 2000 2001 2002 2003 2004 



Over the next five years it is also expected that approximately 643 new drugs will enter 
the market. Based on our discussions, the leading PBMs anticipate rebates for these 
new drugs to offset those lost from aforementioned blockbuster drugs. These new drugs 
will probably increase rebates in therapeutic categories not previously competitive, or in 
classes that are altogether new. This trend, in conjunction with the aging population and 
the expected higher utilization of drugs, will contribute to the overall increase in drug 
costs. 

Many of the new drugs developed will reflect the demographic changes driving the U.S. 
healthcare system (e.g. drugs designed for geriatric and chronic conditions). Other 
drugs will target previously untreatable diseases, while a large percentage will be lifestyle 
drugs (e.g. Viagra). This will place a heavier burden on the PBMs whose clients will 
expect them to continue to control drug costs and utilization while providing access and 
coverage to many of these new drugs. 

In light of these challenges, PBMs have been looking for opportunities to improve their 
profitability while helping their clients better manage drug spending. As a result, PBMs 
are increasingly segmenting their client base when contracting with manufacturers, and 
receiving higher rebates for those clients willing to provide incentives for member 
behavior changes, either through three-tiered co-pays or more restrictive plan designs. 
PBMs are also offering, and charging for, clinical and disease management programs 

Ibid. It is not expected that all 643 drugs will make it to market due to later clmical trials demonstrating lower 
efficacy and unfavorable side effects. 

Prescription Drug Trends in the U.S. 2000, PCS HealthSystems, p. 24. 



39 



C200I, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

intended to control utilization and cost. Many of these programs feature nsk-sharing 
arrangements that allow the PBM to retain a percentage of the savings realized by the 
client. 

PBMs are also facing increased regulatory pressure. Of prime concern to the PBMs we 
interviewed are the recent HIPAA regulations governing patient privacy, and pending 
state legislation that prohibit clients from implementing certain restrictive plan design 
features. PBMs are wary that these regulations could hinder their ability to effectively 
help their clients manage drug cost and utilization by limiting the use of patient data in 
developing clinical programs. In addition, the PBMs believe upgrading their systems and 
operations to become HIPAA compliant could be costly. 



40 



©2001. PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.1.5 PBM Legislative and Regulatory Environment 

Given their role in the pharmacy and healthcare industries, PBMs are subject to a myriad 
of federal and state regulations and laws. These laws often overlap in scope, and in many 
cases have not been tested in the courts. In addition, there is pending legislation 
(including HIPAA) whose impact on the industry remains to be seen. Table 5 outlines the 
key regulations that impact and govern the PBM industry. 

Table 5: Key Regulations Impacting and Governing the PBM Industry^^ 



Regulatory Issue 


Description 


Privacy 


Federal and state laws that control access, distribution, and use 
of a patient's private medical and pharmacy information. 


Benefit and Plan 
Design 


Proposed and existing state laws that prohibit clients from 
implementing certain restrictive plan design features. 


Anti-Remuneration/ 
Fraud 


Federal and state laws that prohibit the receipt of financial 
incentives to induce referrals of persons covered by federally 
funded healthcare programs. 


Drug Dispensing 


Federal and state laws designed to control the clinical care 
patients receive, with specific laws precluding commercial 
activity that interferes with a patients well-being (e.g. mail 
pharmacy regulation, generic substitution laws and therapeutic 
substitution laws). 


Network Access 


State laws that affect a PBM's ability to offer less restrictive 
retail pharmacy networks, and a PBM's ability to remove retail 
pharmacies from their network. 


Licensure Issues 


State laws requiring a mail pharmacy to be licensed in the state it 
is located, or the states it services. 


Drug Pricing 


Federal and state laws governing the price manufacturers can 
charge. 

State-sponsored programs to provide drug benefits to indigent 
seniors. 



' Ranked in descending order of perceived impact on PBM operations. 



41 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Privacy 

PBM operations require the receipt and use of a member's confidential pharmacy 
information. Often, PBMs are required to electronically transmit this information to their 
clients. Out of concerns related to the transmission and use of private, confidential 
medical information, the federal government and most states have enacted patient 
confidentiality laws, placing restrictions and imposing standards on the use and 
transmission of medical information by healthcare organizations. 

Health Insurance Portability and Accountability Act (HIPAA) of 1996 

In 1996, Congress passed the Health Insurance Portability and Accountability Act 
(HIPAA) to address problems and issues related to the privacy, confidentiality, and 
security of healthcare-related data and information. On Dec. 28, 2000, the Department of 
Health and Human Services (HHS) published a final rule creating new federal privacy 
rights for personal health information. The rule became effective April 13, 2001, and all 
healthcare providers, health-related companies, and PBMs are required to become 
compliant by April 15, 2003. Going forward, the President has granted the Secretary of 
Health and Human Services authority to change the rule for the purpose of clarification. 

These regulations establish security standards to protect all electronic health data from 
improper access, alteration, or loss, and impose "extensive restrictions" on the use and 
disclosure of individually identifiable health information. 

All healthcare providers, health-related companies, and PBMs are expected to comply 
with HIPAA, or face severe penalties. The final HHS rules are likely to require PBMs to 
make significant changes to their information systems, policies, and procedures to protect 
patient privacy and the security of data. This could impact long-term profitability 

PBMs are concerned about the impact of HIPAA and the final regulations due to: 

• The imprecise definition of healthcare and healthcare related operations; 

• The lack of national standards; 

• The administrative burdens and increased costs; 

• Liability issues; and 



Banahan, Benjamin, and Suzy Buckovich, "Patient Privacy, Confidentiality and Security," Drug Topics 144, no. 4 
(February 21, 2000): 77. 

^"^ ESI, Inc., "10-K Report to the Securities and Exchange Commission" (1999), p. 22. 



42 



©2001, PncewaterhouseCoopers LLP 



i 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• The authorization requirements to transmit or release a member's personal healthcare 
data and information. 

HIPAA supercedes any state laws that are less restrictive; however, it does not preempt 
any state laws that are more restrictive. Currently, most states have enacted privacy laws 
that established standards regarding patient confidentiality and have regulated access to 
medical records. 

PBMs are evaluating the potential impact these final regulations will have on their 
operations. It is unclear whether the final regulations will allow PBMs to access and use 
health information for utilization review, quality assessments, audits, and other routine 
healthcare operations. Based on our interviews with the leading PBMs, they felt that 
these regulations could hinder their ability to effectively help their clients manage drug 
cost and utilization, by limiting the use of patient data in developing clinical programs. 

Benefit and Plan Design 

At least six states, including New Jersey and Virginia, have enacted or proposed 
legislation that prohibits clients from implementing certain restrictive benefit design 
features. For example, some states prohibit or restrict a PBM's clients from using 
therapeutic substitution programs, require coverage of all FDA approved drugs, and 
prohibit the denial of coverage for non-FDA approved uses of approved drugs. 

These types of laws and regulations are not directly applicable to PBMs, but do impact 
the type of drug benefits their clients can implement. The PBM industry believes that if 
these laws were to become broader in scope and universally adopted, then they could 
impact the efficacy of PBM cost reduction programs; this could have a significant impact 
on PBM operations and profitability."**^ 

Anti-Remuneration/Fraud 

Federal law prohibits, subject to certain exceptions and "safe harbors, " the receipt of 
financial incentives to induce referrals of persons covered by federally funded healthcare 
programs (i.e. Medicare and Medicaid) or the purchase of items or services for which 
payment may be under federal programs. In addition, some states have enacted similar 
laws that go beyond the requirements of the federal statutes. Due to the federal statutes' 
broad scope, Safe Harbors have been established which limit liability. Safe Harbors exist 
for certain properly reported discounts, certain investment interests, certain properly 



Ibid., p. 17 



43 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

disclosed payments made by vendors to group purchasing organizations, and certain 
discount and payment arrangements/^ 

The Office of the Inspector General and other governmental entities have begun to 
investigate PBMs and companies that have contractual relationships with PBMs. Issues 
of concern include the development of drug formularies, therapeutic substitution 
programs, and the rebates PBMs receive from manufacturers. The leading PBMs we 
interviewed all believe that their policies, procedures, and practices are in compliance 
with the anti-remuneration and fraud statutes, and defined Safe Harbors. However, they 
recognize that they could be subject to scrutiny under these laws, which could have 
adverse effects on the PBM industry. 

Drug Dispensing 

PBMs are affected by a variety of state and federal drug dispensing laws and regulations. 
Regulation of mail pharmacies, generic substitution laws, and regulation of therapeutic 
substitution programs can impact PBM mail pharmacy operations and the effectiveness 
of their clinical programs. 

Mail Pharmacy Regulation 

PBMs are subject to state and federal laws and regulations that impact the operation of 
their mail pharmacies. PBMs must comply with statutes that govern the operation of mail 
pharmacies, repackaging of drug products, dispensing of controlled substances, and 
medical waste disposal. Federally controlled substance laws require PBMs to register 
pharmacies with the Drug Enforcement Administration (DEA). 

The Federal Trade Commission requires mail pharmacies to engage in truthful 
advertising, to stock appropriate inventory levels, to fill orders within 30 days, and to 
provide refunds to members as appropriate. In addition, the United States Postal Service 
currently has statutory authority to regulate and restrict mail service of drugs. However, 

43 

to date, the Postal Service has not exercised such authority. 
Generic Substitution Laws 

After passage of the Waxman-Hatch Act of 1984, which removed many of the 
impediments to market entry facing manufacturers of generic equivalents of branded 
drugs, all states enacted generic substitution laws. These laws, replacing earlier anti- 



'\ Ibid. 

Caremark, "10-K Report to the Securities and Exchange Commission" (1999). p. 4 

"The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change," 
Federal Trade Commission, pp. 19-20. 



44 



£2001, PricewaterhouseCoopers LLP 



Z3 



HCFA Study of the Pharmaceutical Benefit Management Industry 

substitution laws, were designed to promote the substitution of lower-priced generic 
drugs for higher-priced branded drugs. Under the new laws, a pharmacist can dispense a 
generic drug even when a brand-name drug is specified, as long as the physician does not 
specify "dispense as written." These laws have had a significant impact on the price of 
branded drugs, and have contributed to lower drug costs. 

Therapeutic Switch Laws 

In contrast, therapeutic switch programs, in which PBMs switch the drug a physician has 
written for a drug preferred by the PBM, have faced challenges in many states. These 
challenges have been made largely on the grounds of consumer protection. In particular, 
a mail pharmacist's incentive to act as a "good agent" for members could change under 
the influence of therapeutic substitution policies.'*^ Mail pharmacies that receive rebates 
for specific branded drugs could steer patients toward these drugs, even though members 
may have been prescribed a low-cost or high quality alternative. Although most 
therapeutic substitutions programs require a physician's approval, physicians may lack 
the necessary information to make the best decisions for members. Hence the laws to 
regulate therapeutic substitution programs, which could encourage drug switches that 
may not be in the best interest of a member. 

Network Access 

Most states have enacted regulations and laws that affect a PBM's ability to offer more 
restrictive retail pharmacy networks, and their ability to remove retail pharmacies from 
networks. These types of laws, also referred to as "any willing provider" laws, require 
PBMs to include any retail pharmacy in their network willing to meet a PBM's 
negotiated price and other terms for network participation.'*^ 

Access laws do not significantly impact PBMs, because most PBMs maintain national 
networks. In general, PBMs include any "duly licensed pharmacy" in their network that 
meets and adheres to their participation criteria, which typically include adequacy of 
insurance, minimum hours of operation, and the absence of disciplinary actions by 
relevant state and federal agencies."*^ 

Licensure 

Most states have enacted licensure and registration laws that govern a wide spectrum of 
healthcare organizations. The scope of these laws varies from state to state and the 
application is often ambiguous as it relates to PBM operations. Most PBMs will comply 
with these laws on a state-by-state basis, as appropriate. For example, some states have 

Ibid. 

Caremark, "10-K report to the Securities and Exchange Commission" (1999), p. 8. 
ESI, "10-K report to the Securities and Exchange Commission" (1999), p. 19. 



45 



©2001, PricewaterhouseCoopers LLP 



_ In 



HCFA Study of the Pharmaceutical Benefit Management Industry 



increased the regulatory requirements of prior authorization programs, typically 
administered by HMO clients. In response, some PBMs have obtained state utilization 
review licenses. 

PBMs must be licensed in each state in which it operates a mail pharmacy. Some states 
require mail pharmacies that deliver drugs to members in their state to be licensed by its 
board of pharmacy. Generally, many states permit the dispensing pharmacy to follow the 

48 

laws of the state within which the dispensing pharmacy is located. However, some 
states have enacted laws and/or regulations designed to prohibit or limit the operations of 
out-of-state pharmacies. Typically these states require the mail pharmacy to comply with 
all state laws irrespective of whether these laws conflict with the laws of the state where 
the mail pharmacy is located. 

Drug Pricing 

The federal and state governments use a variety of laws and regulations to regulate 
prescription drug costs and prices. In order for a manufacturer to receive reimbursement 
under Medicaid, Federal Supply Schedule (FSS), or Public Health Services (PHS), they 
must participate in all three of these programs at the same time. Key laws governing drug 
pricing include: 

• State laws that provide prescription assistance programs to low-income seniors; 

• State unitary pricing programs, which mandate that all drug wholesalers have access 
to the same pricing and discounts; 

• Medicaid best price laws, which stipulate that a manufacturer participating in a state 
Medicaid program must give the state the lower of the best price available to any third 
party payer or a legislated discount; and 

• The Federal Supply Schedule, which regulates drug prices paid by Federal agencies, 
such as Veterans Affairs, the Department of Defense, the Coast Guard, and indigent 
hospitals (Public Health Services). 



Caremark, "10-K report to the Securities and Exchange Commission" (1999), p. 7 



46 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Indigent Senior Drug Programs 

As of February 2001, 26 states offered prescription assistance programs that provide 
coverage low-income seniors. Many of these indigent senior drug programs receive 
manufacturer rebates, which are calculated in a similar fashion to the Medicaid rebates. 

Most states have income limits for eligibility of between 170-225% of the poverty level. 
In addition, many assistance programs provide limited access for a small percentage of 
Medicare beneficiaries, ranging from 0.2% in Minnesota to 18% in Rhode Island. A 
recent study by the White House Office of Management and Budget claims that only 45% 
of eligible Medicare beneficiaries are enrolled. This is believed to be due to the stigma 
associated with low-income programs and the lack of awareness of the availability of 
these programs. 

State Unitary Pricing — The Maine Model 

Maine (other states have proposed legislation) recently passed a prescription drug pricing 
law that allows the state to negotiate lower prices on drugs for the uninsured and 
ultimately to impose price controls if negotiations are unsuccessful. The law requires 
drug companies to offer unitary pricing plans, in which discounts must be based on 
volume, not the type of customer. Maine became the first state to enact such a law. 

In order to have access to the Maine Medicaid program, manufacturers are required by 
Maine law to offer the same pricing and rebates to all wholesalers. The state passes these 
rebates on to pharmacies, which discounts drugs purchased by seniors. Currently, 2 1 
other states are considering similar legislation. Pharmaceutical groups have countered 
that this legislation would ultimately lead to reduced access and rationing, and could 
impact research and development, slowing the development of new life-saving drugs. 

Currently, PBMs are unaffected by Maine's unitary pricing laws. However, if these laws 
are enacted in a state with a mail pharmacy, then a PBM's ability to negotiate discounts 
for drugs dispensed through their mail pharmacy will be limited. In addition, some 
manufacturers will not pay PBMs rebates for clients located in Maine. 



"State Senior Pharmaceutical Subsidy Proposals, 2001", National Conference of State Legislatures website, 
March 21, 2001. 

^" "State Rx Plans Enroll From .2% to 18% of Medicare Beneficiaries, GAO Say," The Pink Sheet, 62, no. 30 
September 18, 2000 

" Moskowitz, Daniel, "Federal and State Laws and Regulations Affecting Managed Care", Drug Benefit Trends 12, 
no. 8 (August 2000): 23-24. 



47 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Medicaid Best Price 

The Omnibus Budget Reconciliation Act of 1990 established the Medicaid rebate 
program, which requires manufacturers to pay the states and the federal government a 
rebate to equal to at least 1 5. 1% of the average whole acquisition cost for sales to 
Medicaid beneficiaries. In 1996, this program reduced total Medicaid drug expenditure 
from $11 billion to $9 billion." 

Medicaid rebates may exceed 15.1%, because of the "best price" provisions that 
guarantees Medicaid access to the lowest price paid by any private purchaser of a 
manufacturer's branded products. However, PBMs rarely receive rebates from 
manufacturers greater than 15%, because manufacturers rarely extend their best prices to 
PBMs. These prices are typically reserved for large, closed model HMOs such as Kaiser 
Permanente. Additionally, manufacturers are obligated to pay a "penalty rebate" if their 
pricing increases exceed CPI-U (consumer price index—urban). 

Veterans Health Care Act fVHCA) of 1992 and the Federal Supply Schedule (FSS) 

The Veterans Health Care Act (VHCA) of 1992 established the Federal Supply Schedule 
(FSS). Prices paid to drug manufacturers by federal agencies, such as the Department of 
Veterans Affairs and the Department of Defense, are set by the FSS. 

Generally, the FSS price may be no higher than the lowest contractual price charged by 
the manufacturer to private purchasers. FSS prices are approximately 60% below the 
nonfederal average wholesale price. Manufacturers have an incentive to comply with 
the FSS, because they want access to federal facilities and many physicians receive their 
training from VA hospitals. From sales and marketing perspective, manufacturers want 
VA trained residents to be familiar with their drugs. For certain drugs sold to the VA, the 
Department of Defense, the Public Health Service, and other agencies, a manufacturer 
must charge the lesser of the FSS and federal ceiling prices. The federal ceiling price is 
set at 24 % of the average wholesale price charged to nonfederal purchasers, and may be 
higher or lower than the FSS. 



" Cook, Anna, "Pricing Mechanism Used by the Federal Government to Contain Prescription Drug Costs," August 
2000. Prepared for U.S. Department of Health and Human Services' Conference on Pharamaceutical Pricing 
Practices, Utilization and Costs. 

" Report to the President: Prescription Drug Coverage. Spending^ Utilization and Prices, Department of Health & 
Human Services, April 2000. 



48 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 
2.1.6 Important Trade Organizations 

The PBM industry relies on several key trade organizations to provide legislative support, 
develop industry standards, promote the exchange of data and information, and provide 
representation for the industry in a variety of public and private forums. These 
organizations include: 

• American Academy of Managed Care Pharmacist (AMCP) - AMCP is a 
professional association of pharmacists and associates whose goal is to serve patients 
and the public through the promotion of wellness and rational drug therapy by the 
application of managed care principles. The mission of AMCP is to serve as an 
organization through which the membership pursues its common goals; to provide 
leadership and support for its members; to represent its members before private and 
public agencies and health care professional organizations; and to advance pharmacy 
practice in managed health care systems. 

• Health Distribution Management Association (HDMA) - HDMA is the trade 
association that represents pharmaceutical and related healthcare product distributors 
throughout the Americas. HDMA was formerly known as the National Wholesaler 
Druggists Association (NWDA). 

• National Association of Chain Drug Stores (NACDS) - NACDS represents the 
views and policy positions of member chain drug companies. This purpose is 
accomplished through the programs and services provided by the association which 
emphasize ensuring the community retail pharmacy perspective is communicated to 
and understood by legislators and policy-makers; creating a favorable political and 
business climate in which NACDS member companies can carry out their business 
plans; providing appropriate forums for retailers to interact with their suppliers and 
business partners; and developing and promoting policies and programs aimed at 
improving merchandise distribution and retail operations efficiency. 

• National Council of Prescription Drug Programs (NCPDP) - NCPDP is a non- 
profit ANSI-accredited Standards Development Organization. Their mission is to 
create and promote data interchange standards for the pharmacy services sector of the 
health care industry, and to provide information and resources that educate the 
industry and support the diverse needs of our members. 



49 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

2.2 Industry Capacity Overview 

PBMs operate in a complex system that includes pharmacies, manufacturers, clients, 
members, and physicians. The largest PBMs are serving 20 million or more members, 
using a highly automated operation that is relatively insensitive to volume increases. 

PBMs today administer drug benefits for 65-70% of our nation's seniors, and the leading 
PBMs we interviewed do not expect a Medicare drug benefit to have a significant impact 
on industry capacity. 

This section describes the administrative and clinical services PBMs provide. In addition, 
an analysis of PBM services that could be impacted by the addition of a large Medicare 
population is included. 



50 



92001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

2.2.1 PBM Operations 

PBMs provide their clients administrative and clinical services, as shown in the following 
table. 



Table 6: PBM Services 



Overview of PBM Services 


Administrative Services 


Client Services 

• Benefit Administration 

• Eligibility Administration 

• Reporting 


Pharmacy Network Administration 


Mail Pharmacy Operations 


Claims Adjudication 


Member Services 


Manufacturer Contracting and Rebate 
Administration 


Clinical Services 


Formulary Management 


Therapeutic Substitution Programs 


Utilization Management 


Disease Management 


Emerging Clinical Programs 



51 



£2001, PricewaterhouseCoopers LLP 



mm 



HCFA Study of the Pharmaceutical Benefit Management Industry 

PBM Administrative Services 

Administrative services that PBMs provide their cHents include client services, pharmacy 
network administration, mail pharmacy operations, claims adjudication, member services, 
and manufacturer contracting and rebate administration. 

Client Services 

Client services are comprised of benefit administration, eligibility administration, and 
reporting. 

Benefit administration involves setting up and maintaining the drugs that are covered or 
excluded from the benefit. Most clients have different drug benefit designs to cover 
different employee/member groups (e.g. exempt, non-exempt, and retirees). A drug 
benefit design also includes the maximum benefit levels, co-pay, co-insurance, and 
deductible requirements. In addition, the drug benefit design may establish prior 
authorization requirements for specific drugs and/or therapeutic categories. 

Eligibility administration is the enrollment, and ongoing maintenance, of members and 
their dependents. PBMs receive enrollment information from clients and maintain 
eligibility files. They are not responsible for the enrollment of members; the client 
handles this task. PBMs assign a client service team to support their larger clients. This 
team is the primary contact for the client to coordinate enrollment, administer benefits, 
and resolve issues. 

Reporting includes standard (monthly, quarterly, and annual) and ad hoc report packages 
PBMs offer to their clients. Typical reports focus on drug utilization, drug cost, and PBM 
service levels. 

Pharmacy Network Administration 

Pharmacy network administration is the maintenance of the PBM's extensive network of 
pharmacies, and includes services such as network development and maintenance, 
network contracting, reimbursement and pharmacy audits. The pharmacy network 
specifies which pharmacies are approved for members, and includes retail, mail, and in 
some cases specialty pharmacies. PBMs routinely audit retail pharmacies in order to 
detect and prevent fraudulent or erroneous activities. 

Mail Pharmacy Operations 

In addition to retail networks, all the leading PBMs own and offer a mail pharmacy 
service to improve member access and help their clients better control costs. Mail order 
pharmacies are used for chronic medications, since there is a delay of several days in the 



52 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

receipt of medications. They also typically dispense a 90-day supply of drugs (versus 30 
days in retail). 

Claims Adjudication 

Claims adjudication is the online processing of a prescription drug claim. Most claims are 
submitted electronically at the point of service (the retail or mail pharmacy) when service 
is rendered. Paper claims (less than 1% of all claims) are manually entered into the claims 
processing system by the PBM. The claims system tests the member's eligibility and 
coverage to determine pharmacy reimbursement and member's co-pay. In addition, these 
systems apply a series of messages and edits to ensure the clinical appropriateness of the 
drug dispensed, and to drive appropriate utilization. 

Member Services 

Member services provide call center support to members and pharmacists. Member 
education and questions related to their benefits, pharmacy access, and adjudication 
issues are handled by member services. In addition, member services provide a 
"welcome" packet, which typically includes the member's drug card, drug coverage, 
required co-pays, benefit limits, information on how to access their pharmacy network, 
use the mail pharmacy, and submit a paper claim. Some of the leading PBMs have 
provided special training to their customer service representatives that interact with 
seniors. This training includes identifying emergent medical situations and offering 
clinical programs. 

Manufacturer Contractins and Rebate Administration 

Manufacturer contracting and rebate administration works directly with manufacturers to 
develop contracts, submit rebate claims, and allocate rebates to clients. Manufacturers 
pay rebates and administration fees to PBMs, because PBMs can influence the drugs that 
their members use. Manufacturer rebates are usually shared with or passed completely on 
to clients, while administrative fees are retained by the PBM. It is common for large 
clients to receive 100% of rebates. 

PBM Clinical Services 

PBMs use a variety of clinical services to help their clients control the cost and utilization 
of their drug benefit. The most common clinical services used by PBMs include 
formulary management, therapeutic substitution, utilization management, and disease 
management. 



53 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Formulary Management 

Formulary management is the process of developing and maintaining a formulary. A 
formulary is a continually updated list of branded (and generic) drugs favored by the 
PBM (or its clients). Formulary development is managed through the PBM's Pharmacy 
and Therapeutics (P&T) Committee. A formulary works in concert with the member's 
drug benefit to determine which drugs are covered and the member's co-pay. PBMs 
typically develop a national formulary and will often customize formularies for specific 
clients. A PBM may also administer a formulary developed by its client. 

Therapeutic Substitution Programs 

Therapeutic substitution programs are typically operated in mail pharmacies to encourage 
physicians and patients to switch to lower cost comparable drugs. Therapeutic 
substitution can occur when a new medication becomes available, when drug formularies 
change, or when a manufacturer offers more favorable rebates for a new drug.^'* 

Utilization Management Programs 

PBMs use utilization management programs and to encourage the use of generics or 
preferred products. These programs include services such as prior authorization, drug 
utilization review (concurrent and retrospective), academic detailing programs, and 
patient education. PBMs have also developed specific edits for the senior population. 
These edits include identifying drugs that are not appropriate for a member's age (e.g., 
oral contraceptives), or dosing regimes that are not adjusted for an elderly metabolism. 

Disease Management Programs 

PBMs develop disease management programs to identify and categorize patients 
(especially those with chronic conditions) and to direct these patients towards a specific 
treatment protocol. Disease management programs are usually provided at additional cost 
to clients, beyond the PBMs standard service offering. Compliance programs, especially 
for severe/high cost conditions such as transplants, fall into this category. 

Emerging Clinical Programs 

Some emerging clinical programs offered by PBMs include contracting with specialty 
pharmacies, the use of the Internet as a portal for member and physician education, and 
enhanced access to mail and retail pharmacy services. PBMs are enhancing their Web 
capabilities, offering personalized, comprehensive services to members via their 

Fish, Leslie and Barbara Edelman-Lewis, "The Impact of a Therapeutic Interchange Program in a Managed Care 
Organization," yowr/ia/ of Managed Care Pharmacy 5, no. 5 1999: 438-444. 



54 



©2001. PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Websites such as health content and benefit design. Another recent focus is enhancing 
physician connectivity to PBMs and pharmacies to improve formulary and clinical 
control at the time the prescription is written, and to reduce translation errors when 
pharmacists dispense the drug. 



55 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.2.2 PBM Capacity Considerations 

In our discussions with the leading PBMs, there was general consensus that extending a 
drug benefit to the Medicare population would not have a significant impact on the 
industry. PBMs already administer drug benefits for 65-70% of this population through 
employer groups (e.g., retiree plans) and health plans. Thus, the incremental volume to 
the industry is expected to be approximately 1 1-14 million lives — roughly the size of a 
large new client. This would be an increase of 6-7% in the lives currently covered by the 
four leading PBMs.^^ 

Most PBM operations are highly automated and relatively insensitive to volume 
increases. The leading PBMs have all demonstrated capability to rapidly scale-up 
operations for new, large clients. Examples of this include the following: 

• Merck-Medco recently completed an agreement with United Healthcare to provide 
PBM services to United's 10 million covered lives, which is expected to increase 
Merck-Medco's covered lives to 60 million. 

• AdvancePCS signed a ten-year agreement to provide PBM services to Foundation 
Health Services' 6 million covered lives. 

• Over a two-month period in 2000, AdvancePCS signed agreements with several 
clients totaling 5 million covered lives. 

• Caremark signed agreements with Oxford Health Plan and Coventry Health Care for a 
total of 3 million covered lives over a two-month period in 1999. 

There are, however, some aspects of a PBM that are volume sensitive, but which can 
usually be scaled up quickly. These include administration of benefit design, new 
enrollee education, and call center and mail pharmacy operations. 

In the event of selecting a PBM, HCFA may request the PBMs provide detail on how 
their operations and service levels will change to accommodate Medicare volume, and 
what their projected service levels will be as a result of these changes. 



Total covered lives of Top 4 PBMs = 195 million * 1.06 = 207 million lives, a net increase of 12 million lives. 
Total covered lives of Top 4 PBMs with Non-covered Medicare population = 206 million - 209 million 
Percent change = 6%- 7% 

"Express Scnpts will Lose UHC Contract One Year After DPS Acquisition, " Pink Sheets 61, no. 7February 15, 
1999. 



56 



©2001, PricewaterhouseCoopers LLP 



HCFA Stud y of the Pharmaceutical Benefit Management Industry 

Administration of the Benefit Design 

The administration of the benefit design is sensitive to the number of different plan 
designs that need to be set up, and any ongoing changes to these plans. PBMs are 
accustomed to administering a large number of complex plan designs, which require 
ongoing maintenance. For example, large insurer or employer groups can have upwards 
of 300 plan designs in effect, which vary by type of employee or retiree. The impact of a 
Medicare drug benefit on the benefit design administration operations of a PBM depends 
on the complexity and number of plan designs offered, and the extent to which these 
plans are changed once they have been implemented. 

Member Education and Support Services 

The member services operation of a PBM is sensitive to the number of new enroUees, 
complexity of the benefit design, and the effort required to educate new members about 
their benefit and answer questions. If a Medicare benefit was extended, educating 
beneficiaries about their drug benefit will be very important, given the size of the senior 
population and the complexity in meeting their clinical and administrative needs. With 
some seniors receiving a pharmacy benefit for the first time, and others moving from 
private coverage to Medicare, PBMs will invariably have to respond to increase calls. 
The leading PBMs we interviewed were in general consensus that educating beneficiaries 
posed the greatest risk to successfully implementing a Medicare drug benefit. 

To meet the needs of the Medicare population, the leading PBMs anticipate a need to add 
dedicated member service personnel, and to ensure they have sufficient capacity 
(headcount and technology) in their call centers to handle the anticipated call volume and 
talk times, especially during the open enrollment periods. Based on a survey of the major 
PBMs, senior talk times are approximately 6-8 minutes, more than double that of non- 
seniors (3-4 minutes). This will likely require building and fitting out new facilities, and 
investing in additional information and telecommunication support systems. 

Mail Pharmacy Operations 

Depending on whether and how a mail pharmacy service is extended to the Medicare 
population, a large senior population could impact the mail pharmacy operations of the 
leading PBMs. Since many seniors suffer from chronic conditions, they have the potential 
to become heavy users of mail pharmacies. This could impact a mail pharmacy's logistics 
and fiilfillment operations. As a result, PBMs may need to evaluate the capacity of these 
operations, and scale up accordingly. All of the leading PBMs we interviewed stated that 
their mail pharmacy operations are scalable, such that they could quickly increase 
capacity to meet increased demand. 



57 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.3 Local Market Structure and Roles of Pharmacy Networks 

All PBMs maintain national pharmacy networks to provide members with access to 
drugs. Networks include leading national and regional retail pharmacy chains 
supplemented by independent, mail, and specialty pharmacies. A PBM's pharmacy 
network determines its geographic coverage, not the PBM's location. 

Most PBMs maintain several "standard" pharmacy networks that cover all 50 states, plus 
the territories of Puerto Rico and Guam. The average PBM has 42,000 pharmacies in its 
network. AdvancePCS and Merck Medco have the largest pharmacy networks with 

CO 

approximately 57,000 pharmacies (98% of all pharmacies in the U.S.). 

PBMs routinely design custom networks to provide better pricing through more restricted 
access for their clients. A customized network allows a client with regional or unique 
needs to receive deeper price discounts than the PBM usually offers through its standard 
network. However, such discounts typically come with some inconvenience to the 
members. In general, the deeper the discount, the fewer the pharmacies are willing to 
participate in the network and the farther a member will have to travel to get a 
prescription filled. Custom networks can also be designed to better align with a client's 
geographic requirement. 

The contracts a PBM holds with the pharmacies participating in its network vary. PBMs 
generally receive less favorable pricing discounts with rural and remote pharmacies than 
with urban and suburban pharmacies. This is due to the lower volume a PBM is able to 
drive into rural or remote pharmacies, and their scarcity. 

PBMs use geo-access-mapping software to evaluate the coverage of their pharmacy 
network. Most PBMs provide access guarantees to clients, and often have to contract 
with independent pharmacies in rural areas to meet their obligations. 

A chain pharmacy is typically contracted through the chain's corporate office and is more 
likely to contract with a PBM at a lower rate of reimbursement to capture a PBM's 
significant market share. For example, a chain pharmacy that comprises 50% of all 
pharmacies in a specific region may contract with a PBM for reimbursement rates of 
branded products at average wholesale price (AWP) minus 14% (instead of the usual 
AWP - 13%) if they are one of two chain pharmacy providers within that region. These 
savings are then passed on to the clients. However, many clients elect to maintain broader 
networks in order to avoid member dissatisfaction that may result from limiting the retail 
network. 



Peat, Susan, HMO & PBM Strategies for Pharmacy Benefits (AIS, 1999), p. 36. 
PCS pharmacy data obtained from PCS Website (www.pcs.com). 



58 



£2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Independent pharmacies contract either individually or through a Pharmacy Services 
Administrative Organization (PSAO). Contracting through a PSAO improves contract 
efficiency and enables independents to improve pricing through group purchasing. With 
better pricing, independents are able to contract with the PBMs at reimbursement rates 
that are comparable to those contracted by chain pharmacies. 



59 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



2.4 Overview of PBM Financials and Pricing 

PBM's derive revenue from clients, manufacturers, and in some cases pharmacies, while 
administering the fmancials and pricing of drug benefits (Diagram 15). Please refer to 
Sections 3.2 and 3.3 for a more detailed analysis of PBM financials, pricing and 
contracting. 



Diagram 15: PBM Revenue and Money Flow 




,Co-Pay 



Pharmacy Reimbursement 
(Ingredient Cost + Dispensing_ 
Fee - Co-pay) 



• Administrative Fees 

• Pharmacy Reimbursement 

• Other Fees (e g Custom Reporting) 



PBM 



- ■ 




Rebates and Admin Fees 




Additional Monies (e.g. sale 




of data) 





In general: 

• Clients are charged an administrative fee for services like claims processing. PBMs 
may also charge a small transaction fee for claims processing to the pharmacies 
participating in their network. 

• PBMs reimburse dispensing pharmacies for the ingredient cost plus dispensing fees 
less co-pay for drugs dispensed to members, and then pass this cost on to clients. 

• PBMs receive rebates and administration fees from manufacturers. PBMs typically 
retain the administrative fee, and share the rebates with their clients. 



60 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• PBMs may receive additional money from manufacturers for the sale of data, 

maintaining clinical programs, or other services. Clients may be charged for clinical 
management programs, or other "custom" services such as ad-hoc reporting or 
providing dedicated customer service teams. PBMs may also make a small profit from 
their mail pharmacy operations. 

One of the primary reasons clients retain PBMs, is that PBMs reduce the cost of offering 
a pharmacy benefit. PBMs do this by automating administrative services, obtaining 
discounts on drugs (ingredient cost), and managing drug utilization. As shown in Table 
7, the average prescription costs $59. 17 in an unmanaged market (e.g., fee for service). 
Through a PBM this cost is reduced to $38.96, or 34% less than the fee for service cost. 



Table 7: FFS versus PBM Cost Savings ^' 



Factor 




-Average Dollar V alue Per 
Prescription 


AWP 


$54.79 


FFS Cost Per Prescription to the Patient (AWP + 8%) 


$59.17 


PBM cost per prescription to the client 




Ingredient Cost (AWP - 27%) 


$40.00 


Dispensing fee 


+ $2.50 


Administrative/claims processing fee 


+ $0.30 


Manufacturer rebates 


-$1.10 


Utilization management 


- $2.74 


PBM Cost per prescription 


$38.96 


FFS versus PBM 




$20.21 

(34yo lower than average cost per 
script under FFS). 



1 . Based on internal PwC documents for an actual client. 

2. AWP estimated at $54.79 

3. FFS cost estimated at AWP + 8%. 

4. AWP is a blended number based on a 65/35 brand to generic ratio. 

5. Retail discount is a blended number based on a 65/35 brand to generic ratio. The average branded retail 



discount was assumed at 14% off AWP, and the average generic retail discount assumed at 50% off AWP. 
Retail discount assumed at 27%. 

6. Ingredient cost equals AWP less average retail discount (27%) 

7. PBM cost per prescription is net of total rebates/savings per claim. 



61 



©2001, PncewaterhouseCoopers LLP 



HCFA Stu dy of the Pharmaceutical Benefit Management Industry 

The flow of money and pricing between PBMs and their business partners vanes 
according to the type of contract. There are three types of contracts PBMs hold with their 
cHents: fee-for-service, shared savings, and capitated. 

2.4.1 Fee-For-Service Contracts 

Fee-for-service contracts are the most common pricing arrangements PBMs have with 
their chents. Under these contracts, PBMs are paid for the administrative services they 
provide (claims processing). The PBM retains the manufacturer-paid administrative fees 
and, depending on the client, some percentage of the rebates. With this type of contract, 
the PBM does not assume risk for the cost of drugs dispensed (ingredient cost); this cost 
is passed through to the clients. 

PBMs contract with their clients and pharmacy network for retail pricing for branded and 
generic drugs, for drugs dispensed from a mail pharmacy, and in some cases, specialty 
pharmacies. Pharmacists are reimbursed the discounted ingredient cost, plus a dispensing 
fee. Ingredient cost is typically the lower of average wholesale price (branded), maximum 
allowable cost (generic), or usual and customary (price-charged cash-paying customers). 
The member also pays pharmacists a co-pay. 



Pharmacy Reimbursement = Ingredient Cost (AW? - X%) + Dispensing Fee ~ Co-pay 



Certain PBMs guarantee clients an overall price (e.g., AWP - 12% + $2.50 dispensing 
fee), and then manage the pharmacy network based on negotiated prices, which on 
average are comparable to the prices guaranteed to clients. In some cases, the PBMs may 
generate a small profit off their network pricing. 

PBMs receive claims processing fees from clients on a per transaction basis for a bundled 
package of services that typically includes: basic administrative and clinical services, 
such as claims adjudication, drug utilization review (DUR), member communications, 
member ID cards, provider directories, standard reports, fraud protection, and on-site 
claim audits. PBMs may also charge separate administrative fees for additional services 
not included in the bundled package such as prior authorization, disease management, 
and customized reports. These additional services are paid either on a per transaction 
basis or as a quarterly/monthly flat fee. 



62 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

2.4.2 Risk Sharing (Shared Savings) Contracts 

PBMs also maintain shared savings arrangements with clients. An effective way to 
manage pharmacy cost is through a shared savings arrangement, where the client and the 
PBM share the savings. These arrangements provide incentives for both sides to 
collaborate and run the pharmacy benefit program effectively.^^ 

Under these arrangements, PBMs guarantee clients minimum rebates, generic 
prescription dispensing rates, and discounts from average wholesale prices. Failing to 
meet these targets trigger financial penalties for the PBM. In return, PBMs expect clients 
to sign long term contracts in order to realize potential reductions in utilization and costs. 
Under shared savings contracts, the flow of revenue and drug pricing is similar to fee-for- 
service contracts. However, PBMs will reconcile on a quarterly/monthly basis any drug 
costs savings with the client. 

2.4.3 Capitated Contracts 

Capitated pricing, tested by the PBM industry in the early- 1990s, is essentially non- 
existent today since PBMs generally lost money through these arrangements. For 
example, ValueRx (now Express Scripts) signed a capitated contract with Ford Motor 
Company in 1994 for Ford's unionized workers. Due to significant losses, ValueRx was 
forced to renegotiate this contract a year later. 

In a capitated pricing arrangement, the PBM agrees to assume financial risk for a client's 
drug spending. Capitation is a set dollar amount, established by analysis of pharmacy 
claim data, used to cover the prescription costs for a member. The amount is usually a per 
member, per month (PMPM) rate; the client is responsible for monthly payments to the 
PBM. With this type of contract, the PBM functions in a capacity similar to that of an 
insurer. As a result, PBMs assuming risk are required to have an insurance license. 

Under a capitated arrangement, the PBM receives a PMPM payment from the client. 
This payment (or premium) is expected to cover the PBM's cost of providing pharmacy 
benefits to the client's members, as well as the administrative and clinical services 
provided by the PBM. If the PBM is able to effectively control utilization and spends less 
than the PMPM payment (plus any overhead allocation), then the PBM profits. However, 
PBMs that manage large volumes of patients with catastrophic illnesses may, in fact, lose 
money. 

This type of contract is risky, given unpredictable factors such as the release of new 
branded drugs, escalating drug prices, direct-to-client (DTC) advertising and higher 



' Manien, Elaine, "Vendor Contracting for PBM Services: How to get more than you paid for?" Employee Benefit 
Plan Review 53 no. 10 (April 1, 1999): 22. 



63 



C2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

prescription utilization rates. In addition, PBMs do not have risk arrangements with 
physicians; nor can they benefit from the tradeoff of drugs versus medical costs. PBMs 
have only indirect influence on drug volume, such as physician interventions or through 
increases to member co-pays. Also, pharmaceutical manufacturers have not been 
willing to underwrite the risk of PBM's that enter capitated arrangements. 



Etheredge, Lynn, "Purchasing Medicare Prescription Drug Benefits: A New Proposal," Health Affairs 18 no. 4 
(July 1, 1999): 7. 



64 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



3.0 OPERATIONS RELATED ISSUES 

The services a PBM provides can be categorized as either administrative or clinical. 

Administrative services include client services, pharmacy network administration, mail 
pharmacy operations, claims adjudication, member services, and manufacturer 
contracting and rebate administration. Clinical services include formulary management, 
therapeutic substitution, utilization management, disease management programs, and 
some emerging clinical programs. 

PBMs derive most of their revenue from clients via administrative fees, and from 
manufacturers via rebates and administrative fees. PBMs contract with clients using three 
types of contracts: fee-for-service, risk sharing, and capitated. Manufacturer contracts are 
usually based on the PBMs' ability to build or maintain a drug's market share. 

Prior to contracting with a PBM, clients typically engage in a comprehensive bidding and 
selection process. The bidding process encompasses the time from the decision to request 
a bid through PBM selection. 

This first section of this chapter describes the administrative and clinical services PBMs 
provide. The second section describes PBM financials and pricing, and includes a 
description of administrative fees, pharmacy reimbursement and the cost of 
pharmaceuticals, and rebate administration and payment. The third section provides an 
overview of the types of client contracts. The last section presents the major components 
of the bidding and selection process and provides examples of the processes and 
methodologies used by clients today. 



65 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



3.1 Services 

PBMs provide their clients administrative and clinical services. 



Table 8: PBM Services 



Overview of PBiM Services 


Administrative Services 


Client Services 

• Benefit Administration 

• Eligibility Administration 

• Reporting 




Pharmacy Network Administration 




Mail Pharmacy Operations 




Claims Adjudication 




Member Services 




Manufacturer Contracting and Rebate 
Administration 


Clinical Services 


Formulary Management 




Therapeutic Substitution Programs 




Utilization Management 




Disease Management 




Emerging Clinical Programs 



66 



52001 , PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.1.1 PBM Administrative Services 

Client Services 

Client services include benefit administration, eligibility administration, and reporting. 
Benefit Administration 

Benefit administration is the administration of drug benefit designs. It includes setting up 
and maintaining drug coverage and exclusions, setting limits on drug coverage, and 
defining member cost sharing requirements (co-pays). 

Benefit plan designs specify the prescription drugs that are covered. A drug benefit plan 
typically covers ethical pharmaceuticals. Ethical pharmaceuticals are drugs approved by 
the Food and Drug Administration (FDA) for treatment of specific disease states 
specified by the FDA. Ethical pharmaceuticals require prescriptions. Cosmetic and 
lifestyle drugs such as Retin A and Rogaine, and over-the-counter (OTC) medications 
such as Tylenol, are generally excluded from the drug benefit (members pay for excluded 
medications themselves). Biotech injectables, infused medications, and other medications 
dispensed at an inpatient setting are typically covered under the medical benefit, and not 
included in the drug benefit. 

Clients may maintain several drug benefit plans. This allows them to offer different 
coverage for populations with different needs (e.g. exempt, non-exempt, retirees and their 
dependents). Clients can vary benefit design by employee type, such as exempt versus 
non-exempt or part-time versus full-time. Clients may extend pharmacy and medical 
benefits to qualified retirees. Typically, retirees' cost sharing requirements and coverage 
limits differ from active employees. Coverage is typically extended to members and 
dependents of active employees. Dependents are typically defined as a member's spouse 
and their children. Coverage of children can vary by age and whether or not the child is in 
college. Beyond a defined age limit, children are no longer considered dependents and 
are excluded from coverage under their parent's pharmacy benefit. 

Benefit plans also specify how members share the cost of their drug benefit with their 
employer or group (co-pays, co-insurance, and deductibles). These cost sharing 
arrangements are often used to encourage members to select generics or lower priced 
drugs. Co-pays are fixed amounts that members pay for every prescription. Co-pays can 
vary depending on whether the prescription is dispensed from a mail pharmacy or retail 
pharmacy, whether a brand or generic is dispensed (i.e. a two-tier structure), and whether 
the drug is featured on the formulary (i.e. a three-tier structure). 

Coordination of benefit (COB) programs - the practice of coordinating coverage for 
members eligible for more than one pharmacy benefit - are not typically administered by 



67 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

PBMs because the cost savings have proven insufficient to warrant the administrative 
cost and burden to the member. COB programs typically require members to submit 
paper claims to their primary insurer. Once the primary insurer has paid and provided an 
explanation of benefits, the member is then required to submit a paper claim to the 
secondary payer for any outstanding amount. Most clients fiinctioning in the secondary 
payer capacity choose to pay whatever out-of-pocket expenses the primary payer has not 
covered, but some apply their own co-pay amounts. 

Most of the leading PBMs offer a COB program. As stated above, none of these 
programs are administered on a "real time" basis (e.g., at the time a claim is submitted 
from the point of service for adjudication), but rather rely on paper claims. There is 
typically an added administrative charge for COB programs. 

During our discussions, several leading PBMs stated there appears to be increasing 
interest in COB, as clients look for ways to stem the rising costs of drugs. In general, 
clients with the "richest" benefit plans (e.g., broad drug coverage, low co-pays) and 
employees eligible for drug benefits elsewhere, stand to benefit the most from 
implementing a COB program 

While some drug benefit plans still use a single co-pay structure (e.g. $5-$ 10) for all 
prescriptions, some use a two-tier differential co-pay structure that differentiates branded 
drugs from generics. Under this structure, members pay lower co-pay amounts (e.g. $5- 
$15) for generic drugs and higher co-pay amounts ($10-$25) for branded drugs. In 
addition, some drug benefits plans include a three-tier co-pay structure that differentiates 
branded, generic, and non-formulary. Under this structure, members not only pay 
differential co-pay for brand ($10-$25) versus generic ($5-$ 15), but also pay higher co- 
pay for using non-formulary drugs ($15-$50). Non- formulary drugs are usually branded 
drugs for which the PBM does not receive manufacturer rebates. In the spring of 2000, 
80% of pharmacy benefit plans offered three-tier co-pays, a significant increase from 
36% in the spring of 1998.^' An emerging trend by some clients is the use of a fourth co- 
pay tier for lifestyle and/or "biotech" drugs. Clients often require a 50% co-insurance for 
drugs in this tier, thereby requiring the member to pay one-half the cost of the drug. (The 
most restrictive plan designs only cover formulary-listed products, and typically require a 
generic be dispensed if available. Non-formulary drugs are excluded from the benefit. 
These plans are favored by HMOs that have assumed risk for the cost of their members' 
drug benefit. 



"Managed Care Co-pays: Higher and Higher; More HMOs and Pharmacy Benefit Managers Using Three-Tier 
Cost Control Measures," Business Wire, August 7, 2000. Article used data from Scott-Levin Spring 2000 Managed 
Care Formulary Drug Audit. 



68 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Co-pays are usually comparable for mail and retail, even though retail pharmacies 
typically fill a 30-day supply of prescriptions. Mail pharmacies fill a 90-day supply of the 
same prescription for the same co-pay or one that is only modestly higher (typically twice 
retail); the overall cost to the member is generally one-third lower through the mail 
pharmacy. For example, a member with $10 co-pay for generic drugs, using a retail 
pharmacy, will pay $30 for three 30-day prescriptions. However, by using the mail 
pharmacy they typically pay $20 for a 90-day supply, saving $10. This encourages the 
member to use the mail pharmacy, where deeper discounts off the ingredient cost are 
found than in retail pharmacies, thereby reducing the cost of the pharmacy benefit. 

With co-insurance, members pay a fixed percentage of the cost of each prescription. 
Typically, the co-insurance percent (usually 20%) is fixed irrespective of the type of drug 
dispensed (brand, generic, or non- formulary). However, many clients are moving toward 
differential co-insurance based on the category of drug. For example, members pay 10% 
for generics, 20% for branded and 30% for non- formulary. This form of cost sharing has 
been a traditional feature of indemnity programs, but not widely used in PBM 
administered plans. 

Deductibles — the amount of money a member has to pay out-of-pocket before the drug 
benefit program begins — may be used in conjunction with co-insurance and co-pays. For 
example, some drug benefit plans include a $50 annual deductible. The member is 
responsible for all drug costs equal to $50 or less. Once annual drug cost exceeds $50, the 
member only pays the relevant co-pay or co-insurance. Pharmacy costs are often included 
as part of a member's total medical benefit. Clients may establish maximum annual 
benefit limits on the amount they will pay for medical (and pharmacy) costs per year (e.g. 
$1 million). 

Eligibility Administration 

Client services include enrollment and eligibility administration services that assist 
clients in registering their members and dependents for the drug benefit. PBMs generally 
do not register members and their dependents for their drug benefit. The clients handle 
this process, as well as the collection of member premiums, and provide the PBM with 
enrollment and eligibility information. Key information a PBM receives from its clients 
for an eligible member includes name, unique identifier, age, sex, date of birth, and 
benefit plan. An eligibility file is created from this information, which is used to verify 
the member's eligibility for coverage during claims adjudication. 

Enrollment activity for the PBMs peaks in June and December, as these months are 
typically the enrollment periods prior to the beginning of a client's new benefit plan year. 
Eligibility updates are provided on an ongoing basis for major life events (marriages, 
births, and deaths), and to account for new and terminated employees. PBMs typically 



69 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

require several weeks to map and load a new enrollment file, and one or two days to 
administer eligibility changes. 

Currently, no industry standard exists to support enrollment or eligibility maintenance 
processes. PBMs receive enrollment information in a variety of formats, including floppy 
disk, magnetic tape, and hard copy. Although PBMs generally require the same 
information (e.g., name and date of birth), each PBM has developed its own standard. In 
addition, clients often provide this information in their own formats, requiring the PBM 
to map the data into the eligibility file used during claims adjudication. 

Reporting 

As an aspect of client services, PBMs provide their clients monthly, quarterly, and annual 
reports that focus on drug utilization, drug cost, and service issues. The client and the 
PBM, to anticipate and manage utilization trends and costs, use these reports and 
combine them with information about trends in drug development (new drugs on the 
market, patent losses, etc.). 

Monthly reports provided to clients typically include standard cost, utilization, and 
performance indicators. These include claims data such as total drug cost, total ingredient 
cost, total cost sharing, total cost savings from generic and therapeutic substitution 
programs and denied claims, and reports that list the top pharmacies by cost, top 
prescribers by cost, and top drugs by cost. Quarterly executive summary reports often 
provide trend data that includes member demographics, plan cost sharing averages, 
average ingredient costs, brand/generic dispensing rates, retail network performance, and 
mail pharmacy performance. Annual reports typically summarize the plan's performance 
during the year, and often include a statistical summary of cost, utilization, and service 
indicators. In addition, these reports provide a more detailed analysis of the effectiveness 
of specific programs, such as maximum allowable cost (MAC) pricing and utilization and 
formulary management programs. PBMs will provide ad-hoc or customized reports to 
clients for an additional cost. PBMs typically charge per hour fees for computer 
programming and other resources required to produce these reports. 

Client Service Support 

PBMs assign a client service team to support their largest clients (smaller clients are 
typically assigned an account coordinator). The client service team is the primary contact 
for the client to coordinate enrollment, benefit set up, and administration, member 
communications, and issue resolution. Client service teams can be dedicated or non- 
dedicated. Dedicated teams exclusively service specific clients for an additional cost; 
non-dedicated teams provide general support to many clients. 



70 



S2001 , PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Pharmacy Network Administration 

Pharmacy network administration maintains the PBM's extensive network of pharmacies. 
This includes network development, network contracting, reimbursement, and pharmacy 
audits. 

Network Development 

To fill their members' prescriptions, PBMs develop and maintain a network of chain and 
independent retail pharmacies, supplemented by mail and specialty pharmacies. 
PBMs offer their clients a choice of a standard pharmacy network, or a customized 
network. A standard network provides national coverage, and is the network frequently 
selected by clients. A customized network allows a client with regional or unique needs 
to receive deeper price discounts than the PBM offers through its standard network, but at 
some inconvenience to the members (Table 9). In general, the deeper the discount, the 
fewer the pharmacies that are willing to participate in the network and the farther a 
member will have to travel to get a prescription filled. 



Table 9: A Leading PBM's Pharmacy Network Pricing 



Network Type 


Branded Discount Off 


Number of Pharmacies in 




AVVP 


Network 


Standard 


12% 


57,000 


Custom (restricted) 


13.5% 


50,000 



Pharmacy networks are designed to provide good access to retail pharmacies at the 
lowest cost. The more restrictive a network (less access), the better the discounts. In some 
cases PBMs can reduce the number of retail pharmacies in the network by 20%, obtain 
better pricing, yet still meet their contractual obligations regarding pharmacy access — 
typically 1-5 miles from a member's home in urban and suburban areas. 

Most PBMs require their network pharmacies adhere to the policies and procedures of the 
PBM, such as reasonable hours of operation, promotion of generic substitution, adhering 
to a pricing formula, submission of U&C charges. Additional requirements typically 
include: 

• Submission of electronic claims, using the latest NCPDP format; 

• Active membership in the National Association of Boards of Pharmacy (NABP) (The 
numeric identification number assigned to the pharmacy is verified by the NCPDP); 



71 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• State licensure of the pharmacy and pharmacists, with the licenses clearly displayed at 
the pharmacy; 

• Evidence of a valid tax ID number and an active DEA number; 

• Proof of professional liability insurance; 

• Demonstration that all prescriptions are dispensed in accordance with applicable state 
laws; 

• Maintenance of a customer signature log; and 

• No claims, settlements or judgments outstanding. 

Network Contracting and Reimbursement 

PBMs contract with pharmacy chains at the national level and with independent 
pharmacies directly, or through Pharmacy Services Administrative Organizations 
(PS AOs). PS AOs are group purchasing organizations for smaller, independent 
pharmacies. PSAOs improve contracting efficiency for independent pharmacies, and 
allows them to contract with PBMs at discount rates that are comparable to those 
received by larger, retail chains. Key terms of these contracts include the pharmacy 
reimbursement rates and timing, the PBM's right to audit, and minimum performance 
requirements, such as generic dispensing rates. 

Pharmacies are reimbursed (with the cost passed onto PBM clients) the ingredient cost of 
the drug dispensed plus a dispensing fee, less the member's co-pay by the PBMs. As a 
result, the PBM is not at risk for the cost of the drugs. Retail pharmacies are reimbursed 
either every week or every other week. At the time of claims adjudication, the claims 
processing systems sets the amount the pharmacist will be reimbursed. 

PBMs typically guarantee an overall pharmacy network reimbursement rate for their 
clients, and separately negotiate reimbursement rates to pharmacies that allow them to 
meet client commitments. The actual rates the PBM receives will vary by pharmacy chain 
and network. The PBM may contract with certain pharmacy networks for deeper pricing 
discounts and lower dispensing fees than it is obligated to provide its clients. In other 
cases, the pharmacy discounts are less favorable relative to the contracted rates a PBM 
receives from its clients. If the PBM is successful, it retains the margin while meeting its 
contractual obligations. 



72 



S200I, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Pharmacy Audits 

PBMs retain the right to audit retail pharmacies participating in their PBM network. This 
enables the PBM to monitor, deter, and recover fraudulent or erroneous claims. The right 
to audit is stipulated in the contract the pharmacy holds with the PBM. Studies have 
found that approximately 3% of claims submitted to PBMs from retail pharmacies are 
fraudulent, and 2% are claims for which payment should have been denied. Audits of 
retail pharmacies are a standard service PBMs provide their clients 

Pharmacies with higher than normal "abuse indicators" are typically targeted for an on- 
site audit. PBMs use a variety of utilization and cost reports to identify likely abusers 
and then target them for audit. Indicators of abuse include high average prescription 
price, high refill percentages, and high volumes and utilization. 

Audits can be categorized into "off-site," which includes "desk-top" and "real-time," and 
"on-site." 

Desktop audits identify and detect patterns of abuse using statistical probabilities for 20- 
30 key indicators. Examples of these indicators include the brand to generic dispensing 
ratio and the average pills dispensed per script. Desktop audits are used to monitor the 
pharmacy network, and prioritize pharmacies for on-site audits. 

Real time audits enable PBMs to quickly identify erroneous or fraudulent claims and 
mitigate the potential for overpayment. For example, a pharmacy that submits two 
prescriptions for the same drug at the same time as opposed to one prescription could 
receive a phone call questioning whether this should be submitted as one prescription, 
thereby reducing the dispensing fees paid and co-pays collected. Real time audits save the 
PBM the time and expense of an on-site audit, and have a sentinel effect on the pharmacy 
network; they also act as a bulwark against wider fraud and abuse. Criteria for real time 
audits are built into the claims adjudication process. Claims selected for audit are routed 
to the retail pharmacy operations group, from which the outbound phone call is placed. 

On-site audits are limited to pharmacies suspected of heavy abuse. These audits are 
expensive for the PBMs, and often require the use of outside auditors and consultants. 
During an on-site audit, the prescription records maintained by the pharmacy are 
reviewed and compared to the information provided via the claims processing system. 

The leading PBMs we interviewed each perform 30,000-40,000 desktop audits and 500 - 
1,500 field audits annually. These audits resulted in the annual removal of between 5 and 



"The Auditor Cometh," Drug Topics, 141, no. 20, September 20, 1997. 72. 



73 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

15 retail pharmacies from the PBM's network, and the recovery of millions of dollars 
from false or erroneous claims. Most of the PBMs sent the recoveries back to their 
clients; however, some of the PBMs retained a portion of the recovered monies to cover 
their costs. 

Details regarding PBM audits and results are considered proprietary and confidential to 
the PBMs. HCFA should request additional information on this topic as a part of the 
PBM evaluation process. 

Mail Pharmacy Operations 

Most pharmacy benefit plans offer a mail pharmacy service as a way to promote cost 
savings and improve access. The cost savings and convenience of mail pharmacies are 
particularly attractive to seniors with chronic conditions that require long term 
medications. Since there is a delay in receipt of medications via mail pharmacies, mail 
pharmacies are appropriate for long-term medication for chronic illnesses. PBMs own 
most mail order pharmacies, allowing the PBM to promote cost savings for its clients and 
members, increase formulary control, and drive compliance. Members may be 
encouraged (through the co-pay) or required to use mail pharmacies when appropriate. 

Mail pharmacies also enable PBMs to promote cost savings for their clients through 
logistic and fulfillment economies of scale: economies of scale include lower acquisition 
cost due to volume purchasing, larger dispensing quantities, and therapeutic substitution 
programs. The pricing discounts offered through mail pharmacies are larger and the 
dispensing fees lower than those offered through retail pharmacies. Mail pharmacies also 
provide the PBM an opportunity to intervene with therapeutic substitution programs 
before a prescription is filled, thereby facilitating the use of less expensive medications 
(Table 10). 



Table 10: Retail and Mail Discounts and Dispensing Fees 





Brand 


Generic 




AWP Discount % 


Dispensing Fee 


Discount % 


Dispensing Fee 


Retail 


12-15% 


S2.00-S3.00 


MAC 


$2.00-S3.00 


Mail 


18-23% 


$0-S2.00 


50-60% 


$0.-$2.00 



Mail order pharmacies typically dispense a 90-day supply of drugs at two-thirds the co- 
pay for three 30-day supplies at retail. For example, consumers who use mail pharmacies 
will often pay SIO for a 90-day supply for a generic drug, but will pay $5 per prescription 
or a total of SI 5 for three 30-day prescriptions at retail pharmacies. 



74 



£2001. PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Mail pharmacies also offer members the convenience of direct delivery to home or 
another desired location. For seniors that have more than one address, the mail pharmacy 
helps eliminate the need for the paper claims that may result from using a non-network 
pharmacy in remote locations. In addition, members can easily request refills via the 
phone or Internet. 

The major processes in a mail pharmacy are receipt, translation, therapeutic substitution, 
and fulfillment. An overview is provided in Diagram 16; the functions are described 
below. 



Diagram 16: Mail Pharmacy Process Flow 




In the typical mail-order program, the member mails their prescription and co-pay, along 
with the necessary forms, to the mail pharmacy. The mail pharmacy receives and opens 
the mail, and deposits the co-pay into a banking account. Co-pay remittances are 
typically restricted to money orders, credit cards, or checks. This first process is 
commonly called receipt. The next step in the process is translation. Here the prescription 
is entered into the claims processing system for adjudication. If the prescription is 
illegible, the mail pharmacy will call the prescriber for confirmation. 

Once in the claims processing system, the prescribed drug is evaluated to determine 
whether a less expensive drug within the same therapeutic class can be substituted. If a 
substitute is available and clinically appropriate for the member, the prescriber is 
contacted and asked if a switch can be made. Claims for which drugs have been switched 



75 



£2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

are re-adjudicated. Once the drug to be dispensed has been determined, the mail 
pharmacy can then pick, pack, and ship the order. This process is called fulfillment. 
State-of-the-art mail pharmacies rely heavily on robotics to automate this process. The 
larger PBMs fill between 10 and 60 million mail prescriptions annually, with very low 
error rates (less than 0.01%). On average, the members receive their prescription in about 
10 days. Prescriptions are typically mailed by an overnight delivery service. 

Prescription refills follow a similar process. Prescriptions can be refilled over the phone 
or via the Internet. In addition, members can request that refills be mailed to a different 
address than the original prescription. 

Claims Adjudication 

One of the key services PBMs provide is the online adjudication of drug claims 
commonly referred to as claims processing. This process examines the member's 
eligibility and drug coverage to determine the pharmacy's reimbursement and member's 
co-pay. In addition, edits are applied to ensure the clinical appropriateness of the drug 
dispensed, and to drive appropriate utilization. 

In general, claims are processed at the PBM's corporate location. However, as a result of 
growth through mergers and acquisitions, a portion of claims may be processed at the 
legacy company's corporate headquarters site. In general, PBMs own and operate their 
claims processing systems. 

At the point of service (POS), which can be either the retail or mail pharmacy, the claims 
adjudication process begins. Upon receipt of the prescription, the pharmacist enters it into 
the computer along with information from the member's drug card. This information is 
then sent to the PBM's claims processing system via a switch vendor. A switch vendor is 
an independent company that maintains the mailbox routing information necessary to 
send a claim from a pharmacy to the appropriate PBM. Leading switch vendors include 
Envoy Corporation, MedEAmerica, and National Data Corporation. Switch vendors 
typically charge the pharmacy a transaction based fee for their service. 

Once the PBM's claim processing system receives the claim, the claim is adjudicated and 
the pharmacist sent an electronic message confirming the member's eligibility and drug 
coverage, and stipulating the amount the pharmacy is to be reimbursed and the co-pay to 
be collected. The PBMs paid claims file stores the transaction for reporting and audit 
purposes. 

During claims processing, the information submitted by the pharmacy is checked against 
the eligibility file to validate the member's name, benefit plan, and birth date. Upon 
confirming eligibility, the prescription is then checked against the benefit design to 



76 



52001, PricevvaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

confirm drug coverage and the relevant co-pay/co-insurance to be paid by the member. 
The claims processing system also determines the type of network pharmacy submitting 
the claim (either mail or retail), and then calculates the appropriate reimbursement of 
ingredient costs and dispensing fee the pharmacy will receive. 

During the adjudication process, a series of edits are applied to the claim, with 
corresponding messages sent to the pharmacist. These edits are intended to ensure the 
clinical appropriateness of the drug dispensed, and to drive appropriate utilization. The 
edits can be either "soft," in which case the pharmacist can override the edit, or "hard," in 
which case the pharmacist must take the appropriate action or the claim will not be 
reimbursed. 

Soft edits are advisory messages, which the pharmacists can act on or ignore. Many 
pharmacists ignore soft edits because of a lack of time and/or incentives to counsel 
patients or call physicians. An example of a soft edit is a message indicating the 
dispensing of a non-formulary drug. 

Hard edits are messages that the pharmacist cannot override, and are an effective way to 
control a drug benefit. The pharmacists or member assumes the cost of prescriptions 
filled contrary to a hard edit. Examples of hard edits include, but are not limited to, 
messages indicating the prescription is being refilled too soon, or that the drug being 
prescribed is subject to an "NDC lock out." 

An NDC lock out is commonly used by PBMs to control the dispensing of drugs 
marketed under more than one name (e.g. Calan and Isoptin). The PBM typically 
contracts for rebates with the manufacturer of one of the drugs, and uses an NDC lockout 
to prevent their members from receiving the non-contracted drug. NDC lockouts are an 
effective way for a PBM to receive higher rebates for the preferred drug, without 
clinically impacting their member's drug benefit. 

The PBM industry uses a standard format for the electronic transmission of claims for 
processing. This standard was created and is maintained by the National Council for 
Prescription Drug Programs (NCPDP), and is available for a small fee. All PBMs and 
chain and independent pharmacies use this standard. Moreover, chain and independent 
pharmacies have also developed preferred relationships with switch vendors to route 
claims to the appropriate PBMs for processing. 

Nearly all PBMs report that their claims processing systems have an uptime of 98-99%, 
excluding scheduled downtime periods. All PBMs schedule downtime, typically a few 
hours every week or other week for system maintenance. 



77 



©2001. PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Approximately 1% of all claims processed are paper claims. Paper claims are appropriate 
when unique circumstances arise that prevent a claim from being processed 
electronically. For example, paper claims may be required for new employees who are 
not in the PBM's eligibility system, or if a member is on vacation in a remote area 
without a network pharmacy. In the case of a paper claim, the member pays for the drug 
out-of-pocket and then submits the claim to their health plan for direct reimbursement, 
minus the appropriate co-pay. Paper claims are entered directly into the claims processing 
system by the PBM. PBMs charge for the administration of paper claims. Clients 
typically pay $0.25-50.40 per electronic claim processed. While many PBMs do not 
charge retail pharmacies claims processing fees, some do charge retail pharmacies $0.02- 
$0.03 per processed claim. For paper claims, clients are typically charged between $1.00 
and $1.50 per claim processed. 

Details regarding the edits and controls applied during claims adjudication are considered 
proprietary and confidential to the PBMs. HCFA should request additional information 
on this topic as a part of the PBM evaluation process. 

Member Services 

Shortly after enrollment, PBMs provide their members an information packet to help 
them understand their drug benefit. This welcome packet typically includes the member's 
drug card, drug coverage, required co-pays, benefit limits, and list of local network 
pharmacies, as well as information on how to access their pharmacy network, use the 
mail pharmacy, and submit a paper claim. PBMs may also provide the member a copy of 
the formulary. PBMs typically produce the members drug cards, and allow their clients to 
customize the drug cards with a private label. 

PBM's operate a member services call center that provides a 24-hour toll-free help line to 
answer benefit questions, locate network pharmacies, or request additional forms and ID 
cards. The member services department can provide dedicated or non-dedicated support. 

PBMs also provide 24-hour toll-free support to pharmacies in their pharmacy network. 
Pharmacists call the PBM's retail customer service area for assistance in entering the 
information needed for claims adjudication, requesting prior authorization, and to ask 
questions that better help the member understand their drug benefit or the pharmacist 
understand their reimbursement. Typical phone wait time for retail customer service is 
less than 30 seconds. The call center and customer service representatives providing 
member support are typically the same staff that supports the retail pharmacy network. 



78 



C2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Manufacturer Contracting 

PBMs contract with the manufacturers of branded drugs to receive rebates and 
administrative fees, in return for the preferential treatment and increased market share of 
these drugs. Manufacturers pay rebates and administration fees to PBMs, because PBMs 
can influence the drugs that their members use. At a minimum, to be eligible for rebates 
and administration fees, manufacturers typically require PBMs to include the contracted 
drugs on the formulary with no restrictions; the manufacturers may also require PBMs to 
increase market share for their specific drugs above the national average. Additional 
requirements may exist — such as restrictions concerning competitor products or the 
implementation of promotional programs (e.g. PBMs sending mailings to physicians and 
members encouraging the use of a specific product). — depending on the drug and the 
manufacturer. Generic drug manufacturers do not enter into these types of contracts 
because the PBM does not influence which generic brands are carried at the retail 
pharmacy. 

Rebates and administrative fees are commonly paid as a percent of the drugs wholesale 
acquisition cost (WAC) — which represents the manufacturer's sale price — with rebates 
typically ranging from 5-15% of WAC, and administration fees from 1-3%. Rebates 
greater than 15% are rare, since manufacturers may set a new Medicaid Best Price, and 
are then required to rebate Medicaid claims at this level. Rebates and administration fees 
are paid monthly or quarterly. Once a rebate claim is received, the manufacturer has 30- 
90 days to process and pay the rebate. 

The allocation of rebates to the client is dependent on the clients' contract with the PBM. 
Some clients receive all or a fixed percentage of the rebates collected. Other clients may 
receive a guaranteed rebate the PBM is obligated to provide. PBMs are increasingly 
contracting with manufacturers for various rebate levels — typically open, incented, and 
closed — by type of drug benefit used by the client. For example, open formulary clients 
with limited control over the drug benefit might be offered a 3% rebate while a closed 
formulary client is extended a 7% rebate. 

PBMs also typically contract for pricing discounts and/or rebates for generic products 
(and some multi-source branded drugs) stocked in their mail pharmacies. These pricing 
concessions are reflected in the mail pharmacy pricing that the PBMs offer their clients. 



79 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.1.2 PBM Clinical Services 

PBMs use a variety of clinical services to help their clients control the cost and utilization 
of their drug benefit. These techniques can influence the choice of prescriber, pharmacist, 
or patient, and can be performed prospectively, concurrently, or retrospectively. Clinical 
services are intended to work in concert with each other, and with the clients' drug 
benefit. The most common clinical services used by PBMs include formulary 
management, therapeutic substitution, utilization management, and disease management. 

PBMs use a variety of methods to engage patients, physicians and pharmacists in clinical 
services. Telephone calls, written correspondence and faxes are the most common 
methods. In some cases e-mails and face-to-face meetings (academic detailing) are used. 
In addition, pharmacies are routinely sent electronic messages during claims adjudication. 

Formulary Management 

Formulary management is the process of developing and maintaining a list of preferred 
drugs, with the intent of promoting cost-effective clinical care.^"* A drug's position on a 
formulary is typically a prerequisite for that drug to be eligible for rebates. The PBM or 
the client may manage the formulary. 

A formulary is a continually updated list of branded (and generic) drugs favored by the 
PBM (or its clients). Formularies often contain relative cost indices for comparable drugs, 
highlight preferred brands, and include treatment protocols, usage guidelines, and other 
clinical information. Formularies are typically distributed to primary care physicians, but 
patients and pharmacists may also receive them. Electronic messages are often sent to 
pharmacists during claims adjudication indicating products that are non-formulary. 
Formularies are typically produced yearly or every other year, with quarterly updates 
distributed during the interim. 

The PBM's or the client's Pharmacy and Therapeutics (P&T) committee decides which 
drugs are included on a formulary, with the intent of discouraging the use of marginally 
cost-effective drugs.^^ All PBMs have a P&T committee comprised of physicians, 
pharmacists, and other clinicians. Given the constant introduction of new drugs and the 
multiplicity of drugs in the same therapeutic categories, P&T committees meet regularly 
to keep the formulary current. The first consideration of these committees is the clinical 
effectiveness and safety of a drug. However, when multiple drugs exist with similar 



"Concepts in Managed Care Pharmacy Series: Formulary Management," The Academy of Managed Care 
Pharmacy, April 30, 1998. www.amcp.org . Link to Concepts in Managed Care Pharmacy. 



80 



©2001, PncewaterhouseCoopers LLP 



1, 



HCFA Study of the Pharmaceutical Benefit Management Industry 

clinical results, issues such as cost-effectiveness and maximizing manufacturer rebates 
determine which drugs are included on the formulary. 

The formulary works in concert with the member's drug benefit to determine which 
drugs are covered and the member's co-pay. Drug formularies vary in their degree of 
influence and are classified as open, incented, or closed. An open formulary is a list of 
the drugs preferred, but not mandated, by the PBM. Under this structure, all drugs are 
reimbursed regardless of formulary status. An incented formulary applies three-tier co- 
pays (e.g., generic, formulary brand, and non-formulary brand) or other financial 
incentives to influence patients to use formulary products. A closed formulary limits 
reimbursement to formulary drugs, and may require generics be dispensed when 
available. Non-formulary drugs typically require prior authorization (based on medical 
need) to be reimbursed. 

Clients can develop their own formulary or customize the PBM's national (e.g., standard) 
formulary to develop one that better meets the needs or preferences of their practitioners. 
This is typically done by health plans that have their own P&T committee. When 
customizing a formulary, PBMs encourage their clients to consider the impact that 
deviations from the PBM's national formulary can have on their rebates. PBM's routinely 
administer customized formularies on behalf of their clients. Some clients with 
customized formularies, especially large MCOs, negotiate rebates directly with 
manufacturers and administer their own rebate programs. 

Therapeutic Substitution Programs 

Therapeutic substitution programs are typically operated in mail pharmacies to encourage 
physicians and patients to switch to lower cost comparable drugs. In 1996, Prescription 
Solutions reported that its therapeutic substitution program for Medicare mail-order 
customers achieved an 80% success rate in getting maintenance prescriptions changed to 
less expensive therapeutic alternatives for some categories over a six month period.^^ 

Therapeutic substitution programs are used for two reasons: 

• The P&T committee may have identified one drug as superior, and not a therapeutic 
equivalent to the other drugs in a particular therapeutic category; or 

• The PBM has a contract with a manufacturer for rebates making one drug more cost- 
effective than other drugs in the same therapeutic category. 



Ibid., pp. 20-21. 

Namovicz-Peat, Susan, HMO and PBM Strategies for Pharmacy Benefits (AIS Inc, 1999), p. 20. 



81 



32001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Therapeutic substitution requires the prescriber's permission, because the substituted 
drug may have different side effects and drug interaction profile than the drug originally 
prescribed. Prescribers are contacted via auto-fax or by phone. The patient's permission 
is also typically requested, but not required, prior to substitution. For members that 
object, the PBM usually provides the originally prescribed drug at no extra charge. 

Most PBMs focus their substitution programs on new prescriptions received in their mail 
pharmacy, as opposed to refills or retail prescriptions. PBMs target new scripts in the 
mail pharmacy due to the high cost of chronic-illness medications, and the amount of 
time needed to switch the drug. Most PBMs fill prescriptions received by their mail 
pharmacy within 72 hours. Given the time required to administer therapeutic substitution 
programs, and the acute nature of most drugs dispensed in a retail setting, retail 
pharmacists do not typically engage in this practice. PBMs also target new scripts due to 
the low success rate of repeatedly contacting a prescriber after they have denied the initial 
request, as well as the risk of switching a patient that has been successfiilly maintained on 
a drug for an extended time. 

Some PBMs have attempted to develop therapeutic substitution programs for retail 
pharmacies. With these programs, PBMs provide a financial incentive for the pharmacist 
to contact the physician and request a substitution, with additional monies paid if the 
product is switched. The incentives are typically paid in the form of higher dispensing 
fees. The time needed to contact physicians and the acute nature of many of the 
medications dispensed make administering retail therapeutic substitution programs 
problematic. 

Utilization Management 

PBMs use a variety of utilization management programs to lower drug costs and drive 
appropriate utilization. These programs include prior authorization, drug utilization 
review (concurrent and retrospective), academic detailing, and patient education. 



82 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Prior Authorization 

Certain drugs require prior authorization before they are covered under the drug benefit. 
Prior authorization is the pre-approval of a drug by the PBM before a pharmacy can 
dispense it. Currently, prior authorization of prescriptions is used only for a few chosen 
drugs. These are drugs that are very expensive and have major off-label uses not 
approved by the Food and Drug Administration, such as growth hormones, or drugs that 
require medical justification before coverage is approved, such as Viagra and Cox-2 
Inhibitors. Before authorizing prescription of one of these drugs, the benefit manager asks 
the physician about diagnostic tests, symptoms, and other clinical measures that would 
establish the appropriateness of the drug according to evidence-based protocols. 
According to a recent study by Scott-Levin the 10 therapeutic classes with the highest 
number of plans requiring prior authorization include antifungals, migraine treatments, 
select pain medications, antidepressants, cholesterol reducers, alpha-blockers, 
antiulcer/ulcer combinations, calcium channel blockers, sympathomimetic antiasthmatics, 
and macrolides.^^ 

Drus Utilization Review 

Concurrent drug utilization review (CDUR) occurs at the point of sale. During the claims 
adjudication process, a series of clinical edits are applied to the claim that compares 
information about the member (e.g. age and sex), the drug to be dispensed, and 
concomitant medications the member is taking (from the paid claims file). Examples of 
CDUR edits include drug-drug interaction, drug-age conflict (drug not appropriate for the 
age of member), and drug-gender conflict (e.g. male and birth control pills). The 
appropriate message(s) are then sent to the pharmacist. 

Retrospective drug utilization review (RDUR) is the systematic analysis of prescribing 
patterns and utilization based on past claims data. These programs assist PBMs in 
identifying physician-prescribing patterns, identification of pharmacy fraud and abuse, 
and inappropriate or dangerous utilization patterns of members. RDUR programs can 
help PBMs better target patient and physician education programs and disease 
management programs. In addition, physicians are often sent letters highlighting how 
their prescribing practices compare to their peers. 



Clemmitt, Marcia, "Will We Try to Manage Care Again? This Time, for Drugs?" Medicine and Health 54, no. 25 
(June 19, 2000): 1. 

''^ "Audit data outline targets for pharmacy cost control," Employee Benefit News, April 15, 1999. Data obtained 
form Scott-Levm's Fall 1998 Managed Care Formulary Drug Audit. 



83 



£■-2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Academic Detailing and Patient Education 

PBMs make educational materials on specific diseases and wellness available to their 
members. These materials range from simple monographs to Web-based, interactive 
programs. Typical education topics include diabetes, thyroid conditions, heart disease, 
and asthma. 

PBMs have developed clinical consulting and academic detailing programs in an effort to 
influence physicians' prescribing patterns. Detailing is the practice of directly promoting 
drugs to physicians, a practice commonly used by manufacturers to promote new branded 
products on the market. PBMs have modified these programs to educate physicians about 
their prescribing patterns and to focus on the cost-effectiveness of alternative drugs. 
AdvancePCS has developed an academic detailing program that focuses on physicians' 
prescribing habits, comparing them relative to their peer group. Focusing on high cost 
therapeutic categories, pharmacists meet with physicians to educate them about their 
utilization patterns and discuss cost saving strategies. 

Disease Management Programs 

PBMs use disease management programs as a proactive tool to control overall healthcare 
costs for members with dominant, chronic conditions. Approximately 75% of PBMs offer 
disease management program to their clients.'^' The goal of disease management 
programs is to maximize the cost-effectiveness of drug therapies and outcomes, while 
minimizing the total cost of treating the disease. Disease management programs may 
result in higher drug costs due to increased compliance and persistency, but are touted as 
lowering the client's overall healthcare expenditure. Most PBMs offer disease 
management programs for common conditions such as asthma, diabetes, and congestive 
heart failure. Manufacturers often support these programs, because they tend to increase 
drug utilization. 

Nurses and pharmacists, hired by the PBM, administer these programs. These clinicians 
engage in an ongoing dialogue with the patient concerning their condition, the disease's 
progress, and the patient's compliance with their treatment regimen. Members are often 
sent education material and tools to help them remain compliant. Members are required 
to sign-up for these programs with the client billed for the service, or in some cases 
through a shared savings arrangement. PBMs charge for these services in a variety of 
ways that typically include: 



"PBMs Deliver Drug Cost Savings Through Education, Substitution," Physician Manager, December 3, 1999, 
Kreling, David, "Cost Control for Prescription Drug Programs: Pharmacy Benefit Manager PBM Efforts, Effects, 
and Implications," HHS' Conference on Pharmaceutical Pricing Practices, Utilization and Costs, August 8-9, 2000. 



84 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



• Per employee per month basis (approximately $2 PEPM); 

• Per participant per year (PPPY) basis (approximately $600 - $650 PPPY); 

• Per prescription basis (approximately $0.0 1/Rx) for each selected program (e.g., 
congestive heart failure, hypertension). Services billed in this manner are intended to 
identify patients that may benefit from the initiation of additional medications to their 
drug regimen, as recommended in national guidelines and medical literature, with an 
overall goal of reducing total health care spending (e.g., medical and drug). 

• Per case per year (PCPY) basis for patient care management (approximately $300 
PCPY) for selected diseases (e.g., diabetes, asthma). Patient care management is 
intended to help patients improve their health through lifestyle changes, drug 
education, and the optimal utilization of medical services. 

Disease management programs are an additional cost to clients, beyond the PBMs 
standard service offering. 

Emerging Clinical Management Programs 

Emerging clinical management programs offered by PBMs include contracting with 
specialty pharmacies, as well as the use of the Internet as a portal for member and 
physician education and to provide pharmacy related services and physician connectivity. 

PBMs have been developing relationships with specialty pharmacies or have developed 
there own specialty pharmacy operations in order to provide more comprehensive 
services to clients and members. Specialty pharmacies dispenses high cost, low volume 
drugs that target specific patient populations with chronic, potentially life threatening 
diseases such as HIV/AIDS, multiple sclerosis, cystic fibrosis and cancer. These drugs 
typically require infusions or injections administered by a health-care professional, and 
are very expensive ranging from $10,000 - $200,000 per year. Specialty pharmacies 
contract directly with manufacturers to deliver products to patients, physicians, and 
specialized clinics. In addition, they typically handle insurance billing and offer customer 
service, which includes reimbursement counseling and 24-hour pharmacist assistance. 

PBMs have also expanded their services to the Internet offering clinical information for 
patients, physicians, and other care givers via their websites. Members using a PBM's 
mail pharmacy can have their prescriptions filled or refilled directly over the Internet. In 
addition, some PBMs have developed strategic alliances with Internet pharmacies, which 
enables members to purchase OTCs and other health and beauty related products via 
Internet links to these sites. 



85 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

As an example of PBMs' use of the Internet, Merck-Medco's websites offers 
personalized service to its members. The site is organized into four sections: 

• My Page - includes a message center, service alerts, refills reminders, important 
benefit information, and client specific messaging; 

• My Health - offers personalized health content based upon the member's preferences 
and/or the client's preferences; 

• My Benefits - includes information regarding the member's benefit design, co-pays, 
and formulary; and 

• My Prescriptions - enables members to refill and renew prescriptions. 

Another recent focus of some PBMs is physician connectivity. PBMs are developing 
systems, operated through hand held devices, that connect PBMs, prescribers, and 
pharmacists. These systems provide the physician access to formularies, the Physician's 
Desk Reference and drug utilization review edits at the time of prescribing. Once the 
prescription is written, it is transmitted electronically to the pharmacist. Through this 
technology, PBMs hope to help physicians prescribe preferred medications, thereby 
improving formulary and clinical compliance. The PBMs also hope to reduce dispensing 
errors through incorrect pharmacist translation. Ultimately, physician connectivity is 
intended to reduce costs while increasing physician, pharmacist, and PBM productivity. 

For example, in February, 2001 Advance PCS, Express Scripts, Merck-Medco and 
recently announced an agreement to form RxHub LLC, to develop an electronic 
exchange that allows physicians using electronic prescribing technology to link to 
pharmacies, PBMs, and the health plans of their patients. 



86 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.2 Financials and Pricing 

As stated earlier in Section 2.4, PBM's derive the majority of their revenue from clients 
and manufacturers. PBMs typically receive an administrative fee — on a per-claims basis 
— from their clients that covers the majority of services they provide. In addition, the 
PBM retains the administrative fees paid by manufacturers and a portion of the rebates. 
PBMs pass the cost of the drug benefit to their clients. PBMs may also have a shared 
savings arrangement with clients, where the client and the PBM share the savings. These 
arrangements provide incentives for both sides to collaborate and run the pharmacy 
benefit program effectively. 

3.2.1 Administrative Fees (Claims Processing) 

PBMs charge their clients an administrative fee based on the number of claims processed. 
Client administrative fees are approximately $0.30 - $0.40 per processed claim. This fee 
typically covers the PBM's administrative services, as well as basic clinical services like 
formulary management, therapeutic substitution, and utilization management. PBMs may 
charge additional fees for dedicated client or member service teams, ad-hoc reporting, 
special clinical programs (e.g. disease management, prior authorization, etc.) customized 
educational material, or other services. 

Major insurers or HMOs that have outsourced their drug benefit to a PBM typically 
charge their clients for PBM services on a per member per month (PMPM) basis, and 
may list the PBM services as a separate charge or combined with their medical 
administrative charge. Major insurers or HMOs do not sell PBM services as a stand-alone 
product. 

3.2.2 Pharmacy Reimbursement and the Cost of Pharmaceuticals 

Pharmacies are reimbursed by the PBMs (as a pass through from clients) for the 
ingredient cost of the drug dispensed plus a dispensing fee, less the member's co-pay or 
co-insurance. Ingredient cost is based on the lowest of three calculations, depending on 
the drug dispensed: AWP, maximum allowable cost (MAC), or usual and customary 
(U&C). Reimbursement rates vary depending on the network. 

Ingredient cost for branded drugs under patent is typically reimbursed at AWP minus a 
discount percent (usually 12-15%). AWP for all pharmaceuticals is calculated and 
maintained by the third party data vendor Medispan/First Databank. Dispensing fees for 
branded drugs are typically $2.00-$3.00 per prescription. 



87 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Ingredient costs for generic drugs are commonly based on MAC pricing typically 50- 
60% below AWP. MAC prices are typically set at the regional or Metropolitan Statistical 
Area (MSA) level to reflect variations in cost of living across the country. PBMs can 
either set the MAC prices themselves, or use the MAC prices set by HCFA for Medicaid 
beneficiaries. PBM-set MAC prices are usually higher than those set by HCFA to 
encourage pharmacies to participate in their network. Compared to the HCFA MAC, the 
PBM MAC also covers more drugs and is updated more frequently. Some PBMs offer 
higher dispensing fees for generics to encourage the pharmacist to substitute a generic 
equivalent for a branded drug. Dispensing fees for generics are typically $2.00-$3.00 per 
prescription. 

To ensure their clients receive the lowest possible price for drugs, pharmacies are 
contractually obligated to limit their reimbursement to the price they would charge a 
cash-paying customer. This price is called usual and customary (U&C), and is determined 
by the pharmacy. For example, if a retail pharmacy charges a cash-paying customer $20 
for a drug, the retail pharmacy cannot invoice the PBM for an ingredient cost greater than 
$20, regardless of the AWP discount or MAC price in effect for that drug. 

Using the example of a branded drug in Diagram 17, the member has its prescription 
filled for Drug ABC at a retail pharmacy, and pays the required $10.00 co-pay. The 
pharmacy is then reimbursed $14.25 for the ingredient cost (AWP - discount) of the drug 
plus the dispensing fee, less the co-pay [AWP ($25) - 13% + a dispensing fee ($2.50) - 
co-pay ($10)]. 

Diagram 17: Reimbursement of Ingredient Costs — Branded Products 




Invoice 



Invoice 




$21.75+ $2.50 - 510,00^ 
[(AWP -13%) + Dispensing Fee ■ 
Invoice] 



= $14.25 

Co-pay = Client 



$14.25 

(Client Invoice = Reimbursement) 



PBM 



88 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



For generic drugs, the member pays a $5.00 co-pay to the retail pharmacy (Diagram 1 8). 
Given that the MAC price for this drug is set at $6.00, the retail pharmacy is reimbursed 
$4.00 [MAC ($6.00)+ dispensing fee ($3.00) - co-pay ($5.00)]. 

Diagram 18: Reimbursement of Ingredient Costs — Generic Products 




$5.00 

(Co-Pay) 



Invoice 



$4.00 

(Client Invoice = Reimbursement) 




$6.00+ $3.00 - S5.00 = S4.00 
[MAC + Dispensing Fee - Co-pay = Client Invoice) 




Drug XYZ 



Pharmacies do not typically receive discounted pricing (or rebates) on branded drugs. In 
some cases, generic manufacturers will provide pricing incentives to pharmacies based on 
volume, market share, or exclusivity. Retail acquisition cost for branded drugs is 
typically 20%-25% below average wholesale price (AWP), which is the wholesalers 
mark-up from WAC (wholesale acquisition cost). In some cases, retail chain distribution 
centers may pay WAC. 

3.2.3 Rebate Administration and Payment 

PBMs contract with the manufacturers of branded drugs to receive rebates and 
administrative fees. Rebates are usually shared with clients; administrative fees are 
retained by the PBM. Manufacturers pay administrative fees to PBMs for administering 
formulary rebate contracts. These fees range between 1% - 3% of WAC (WAC is the 
cost to the wholesaler for buying the drug from the manufacturer and is typically used as 
the reference price for calculating rebates and administration fees). Typically, 
manufacturers pay rebates and administrative fees for all contracted products dispensed 
to qualified members. The amount of rebate shared with the client is a negotiable point 
and can range from 100% for very large clients to zero for small clients. 



89 



S2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 19: Manufacturer Rebates - Branded Products 




$2.00 * 80% = $1.60 
(Rebate * 80% = Client Share 
of Rebate) 





$20.00 * 10% = $2.00 
(WAC* 10% = Rebate) 



$20.00 * 2% = $0.40 
(WAC * 2% = Admin 
Fee) 



WAC = $20.00 




Using Diagram 19 as an example, the WAC for this drug is $20. After all claims for drug 
ABC have been submitted by the pharmacy for reimbursement for an entire month or 
quarter, the PBM submits a claim to the manufacturer for payment. For the current period 
and assuming an incented formulary, the PBM achieved 20% market share, which makes 
them eligible for a 10% rebate in addition to the 2% administrative fee for all 
prescriptions processed by the PBM. 

Typically, manufacturers pay higher rebates when the market share of a drug exceeds the 
market share in the unmanaged market (e.g. national market share). In some cases, 
manufacturers rebate differently depending on the client's degree of control over 
pharmacy benefit. For example, closed formulary clients might receive better rebates than 
open formulary clients for the same market share. 

PBMs typically pass rebates through to their clients and retain 100% of administrative 
fees. Continuing with the example in Diagram 17, the PBM received a S2.00 rebate and a 
$0.40 administrative fee for each prescription from the manufacturer. The PBM's 
contract with their clients stipulates that the PBM will pass through 80% of the rebates to 
the client. In some cases, PBMs may guarantee their clients a rebate/claim. 



90 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.3 Contracts 

Section 3.3 provides an overview of the types of PBM contracts currently used by clients. 
Sample contracts collected from PBMs participating in this study as well as actual 
contracts employers hold with PBMs were reviewed. The main features of the contracts 
are described, compared, and contrasted. In addition, material differences (if any) 
between contracts used in the public and private sector, or contracts between a PBM and 
an employer versus a managed care organization (insurer, HMO, etc.), are highlighted. 

3.3.1 Types of Contracts 

PBM contracts can be classified into the following three types: 

• Fee-for-service contracts; 

• Risk sharing or shared savings contracts; and 

• Capitation contracts. 

Although PBM contracts contain client specific language and services, the differences 
across contracts can be broadly defined as follows: 

• The organization "at risk" for the cost of the prescription drug benefit; 

• The payment methodology for the cost of prescription drugs; 

• The pricing and payment of administrative fees; and 

• The allocation of rebate dollars between the parties to the contract. 

Regardless of contract type, PBMs generally provide their clients very similar services. 
Fee-for-Service Contracts 

Fee-for-service is the most common type of PBM service contract used by large clients. 
In a fee-for-service arrangement, the client is at risk for all claims and associated 
administrative expenses incurred while the contract is in effect. The PBM acts as a claims 
adjudicator, utilization manager, and customer service provider for this portion of a 
client's health plan. Fee-for-service contracts are also commonly referred to as 



91 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

administrative services only (ASO) contracts. Significant features of a fee-for-service 
contract include: 

• The client is responsible for the cost of prescription drug claims. Typically, 
prescription drug claims (including ingredient costs and dispensing fees) are billed to 
the client by the PBM weekly, biweekly, or semi-monthly, with payment due 
electronically (wire transfer or automated clearing house (ACH) transfer) within 48 
hours. The PBM reimburses the retail pharmacy for the drug costs. 

• Administrative fees are typically billed by the PBM to the client on a monthly basis. 
Basic administrative fees apply to claims processing costs (billed usually on a cost per 
paid claim or cost per processed claim basis). Some large insurance companies will 
bill for administrative services on a per employee per month (PEPM) basis. Other 
administrative fees that cover items such as special reports, custom services, cost 
management programs, etc., which are not a direct function of prescription volume, 
are also billed on a monthly basis. 

• Formulary rebates due to the client are typically credited to invoices or paid to the 
client within the first 6 months after the end of the period (e.g., a calendar quarter). 
The client's share of total rebates usually varies based on the size of the client. Large 
clients typically receive 100% of the rebates. 

Risk Sharing or Shared Savings Contracts 

In a risk sharing or shared savings agreement, the client and the PBM both assume some 
risk for the total cost of the prescription drug program. The agreement may be for the 
total cost of the program or for a particular service within the program. Drug utilization 
review, prior authorization programs, and drug substitution (i.e., generic or therapeutic 
intervention) programs are the most common program elements involved in a shared 
savings arrangement. Key features of a risk sharing arrangement include: 

• The estimation by the PBM of expected costs (claims plus base administrative fees) 
for the contract year. Parameters are set around the expected costs (e.g., 80-90% of 
expected costs, 90-100% of expected costs, etc.). During the contract year, the client 
pays the PBM either on a fee-for-service or a PEPM basis. At the end of the contract 
year, an accounting is made to compare actual program costs with expected costs. The 
PBM and the client share in the positive or negative experience within each parameter 
based on a predetermined risk sharing percentage formula. PBMs usually limit their 
financial exposure to the total of their administrative fees. A few large employers and 



92 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

payers have negotiated contracts with no limit on a PBMs negative exposure. Risk 
sharing arrangements may be set up on either paid claims or an incurred claims basis. 

• Formulary rebates may be either part of or separate from the risk sharing arrangement, 
but usually are treated separately. Rebates due to the client are typically credited to 
invoices or paid to the client within the first 6 months after the end of the period (e.g. 
the calendar quarter). 

Risk sharing may also apply to only a portion of the employer's prescription drug costs, 
such as to a particular cost management program. This type of risk sharing, typically 
referred to as a shared savings program, is used in one or more of the following 
situations: 

• The shared savings approach is used as an alternative method of paying the PBM for 
its expenses in administering the program, rather than paying the PBM on a per 
transaction basis. The client will pay the PBM a set percentage of all demonstrated 
savings from the PBM's various drug utilization review (DUR) management 
programs. The PBM guarantees a minimum level of savings, with additional savings 
shared on a predetermined basis. For example, the PBM guarantees a minimum 7% 
saving from DUR. DUR savings above 7% will be shared 75% by the client and 25% 
by the PBM. 

• For a new program, trial program, or a program developed or installed at the 
insistence of the client, any savings above the initial development costs are shared on 
a predetermined percentage basis. In some cases, the client may also be liable for the 
initial program development costs. 

Capitation Contracts 

Under a capitation arrangement, the PBM is at risk for all claims and basic administrative 
fees incurred. As previously discussed, capitated pricing is essentially non-existent since 
PBMs have historically lost money through these arrangements. As a result, capitation for 
prescription drugs on a stand-alone basis (not included with total medical claims) is rare, 
if not non-existent, in the market today. There are several factors that limit a PBMs 
ability to assume risk. PBMs are not licensed as insurance organizations, and are 
therefore limited in their ability to accept risk. One method used to provide the equivalent 
of capitation is to write a fee-for-service or a risk-sharing contract with a stop-loss limit. 
The PBM then arranges for a reinsurance company to accept the risk above the stop-loss 
limit. This effectively provides the same protection to the client as a capitation 
arrangement. 



93 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Stop-loss policies are uncommon for pharmacy benefits. In the few cases where these 
have been used, the client paid the cost of the stop-loss policy, and was at nsk for the cost 
of the drug benefit up to the limit. Once the limit has been reached, the re-insurance 
company assumes risk for the cost of the drug benefit. 

Another factor limiting the use of capitation contracts is the inability of most clients to 
provide the detailed pharmaceutical data required for a PBM to accurately calculate 
PEPM fees. In discussions with various PBMs, most required at least one full year 
(preferably two years) of detailed claims data (utilization at the individual drug level) to 
even consider a capitation agreement. Some clients and PBMs have discussed contracting 
on a fee-for-service basis for one or two years, capturing the required data, and then 
agreeing to discuss the concept of a ftill or partial capitation agreement. 

Other factors impacting the PBMs assumption of risk include their inability to control the 
release of new branded drugs, drug prices, and demand driven through direct to consumer 
advertising. Also, PBMs lack risk sharing arrangements with physicians, cannot benefit 
from reductions in medical costs as a result of drugs, and have been unable to convince 
pharmaceutical manufacturers to underwrite their risk. 

In instances where capitated contracts have been tested, these contracts generally 
contained the following features: 

• The payment of a PEPM fee by the client to the PBM for both prescription drug and 
basic administrative services. Non-standard administrative fees are usually billed 
separately on a fee-for-service basis. Some capitation contracts specify a limit on the 
coverage of claims paid after the incurred period. For example, claims paid more than 
six months after the end of the contract year will be the client's responsibility on a 
fee-for-service basis. 

• Capitation contracts may be written for multiple years (typically three). These 
contracts may state the PEPM for each year, or may specify a formula for calculating 
the PEPM after the first year, either as a function of actual first year experience, or as 
a function a specific index, (e.g. prescription drug inflation index). Based on the 
recent escalating trend in the cost of prescription drug costs, the majority of capitation 
contracts have their PEPM rates adjusted on a yearly basis. 

• Formulary rebates may be either part of or separate from the capitation arrangement; 
they are usually treated separately. Rebates due to the client are typically credited to 
invoices or paid to the client within the first 6 months after the end of the period (e.g., . 
the calendar-quarter). 



94 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.3.2 Comparative Analysis of PBM Contracts 

This section provides an overview of the key sections of a common PBM contract 
(Tables 1 1-15). A table containing the standard contract sections and a brief description 
of the contents of each section is provided. Following the contract table is a discussion of 
significant variations that occur between a public and private sector PBM contract, and 
between an employer contract and managed care or payer contract. 

Common Aspects of PBM Contracts 

Contracts between clients and PBMs vary based on the individual needs or purchasing 
requirements of each client. However, there are certain features commonly found in most 
contracts. Based on the contracts obtained from the clients and PBMs participating in 
this study we have categorized the common features of a PBM contract as follows: 

• Contract terms and conditions; 

• PBM duties; 

• Client duties; 

• Pharmaceutical pricing and administrative fees; and 

• Compliance and security issues. 



95 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 11: Contract Terms and Conditions 



\ ■' Item 


Standard 


Identification of parties and 
definitions 


Detailed list of standard definitions of all terms relevant to 
pharmaceutical items, identification of all persons or entities 
covered by the contract and all program functions addressed in 
the contract. Especially important is the definition of any terms 
used to describe cost, savings, or performance guarantee 
calculations. 


Contract term 


Initial term is usually 3-5 years, automatic 1-year extensions 
thereafter. PBMs prefer a longer contract term especially if the 
client requests customized programs or services. 


Access to and ownership of records 


Each party shall have access to confidential and propnetary 
information owned by the other party. Each party reserves all 
rights to its proprietary information. PBM will maintain claims 
information for a stated number of years (usually 7 years from 
dispensing date). 

Most contracts descnbe the actual ownership of the patient 
records by the client. Specific rules are established for the use 
and release of any client specific information by the PBM. 
Terms descnbing the return or future use of client claims data by 
the PBM upon termination of the contract are described. 


Termination and assignment 


PBM will make available to the client or successor PBM all 
materials necessary to continue the administration of the plan. 


Notice 


Six months notice of termination without cause by either party. 
Termination with cause (e.g. default) on 60 days notice. 
Conditions for default include breach of contract, non-payment, 
or insolvency. 



96 



©200 1 , PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 12: PBM Duties 



1 Item 


Standard 


Customer service 


PBM will maintain a toll free customer service telephone line (dedicated or non-dedicated). Line will be 
operational 6 days per week, minimum 12 hours per day weekdays, 10 hours weekends. Some large 
clients are now demanding customer service coverage 24 hours per day, 7 days per week. The largest 
PBMs are complying with this request. 

Written communications materials on all programs will be provided to members, with client's pnor 
approval. ID cards and claim forms will be provided initially and periodically thereafter as part of base 
administrative fees. 

Section 3.1.1 provides a detailed overview of PBM administrative services. 


Claims 

administration 


PBM will adjudicate claims in accordance with the contractual provisions (including pharmaceutical 
pricing) and within contractual performance guarantees. Separate pricing may apply to; 

• Retail Brand 

• Retail Genenc 

• Mail Order Brand 

• Mail Order Generic 

• Spffinn nrnviHf*^ a Hf*f3ilpH Hf^^mnfinn of nharmappiifiral nripincr 

Separate performance standards apply to; 

• Retail Electronic claims 

• Retail Paper claims 

• Mail Order claims 

• Section 4.0 provides a more detailed description of common performance guarantees. 

This section also contains a description of the denied claims appeal process (both written and verbal) 
along with a description of the various reports to be provided by the PBM. 


Network 
composition and 
access 


PBM will maintain selected network intact each year with no material changes in composition or member 
access. Provider directories will be maintained and updated penodically in written form and continually 
via the Internet and through a toll-free customer service line. Notification to the client of any major 
change in the network (e.g. loss of a significant pharmacy chain or pharmacy access in a specific 
geographic area) is mandated. 

The duties of the participating pharmacies in relation to the collection of co-pays, services to members, 
and payment are described. Pharmacies are usually required only to collect the applicable co-pay for 
covered pharmaceuticals. 


Utilization and 
cost management 


All utilization and cost management programs will be described in detail in the contract. Additional fees, 
if any, will be clearly itemized. Programs include, but are not limited to: 

• Drug utilization review 

• Prior authorization 

• Generic dispensing 

• Therapeutic intervention and switching 

• L'lbcdbc mdndgciTicni. 

Section 3.1.2 provides a more detailed description of these services. 


Formulary 
management 


PBMs are the ultimate developers and owners of any formularies used in the prescription drug program. 
PBMs usually retain the nght to change the content of the formulary as they see fit. Some client contracts 
require that the PBM notify the client of any pending change in the formulary although approval of the 
change by the client is usually not required. 

Section 3.1.2 provides additional information on formulary management. 



97 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 13: Client Duties 



1 Item 


Standard 


Duties/responsibilities of the 
client 


This section contains the specific responsibilities of 
the client, including: 

• L^llglUllliy iillL/i Illation \^JlldliUU Ul II alloIIilobiUll, 

frequency, and file format), 

• Plan design (establishment of plan design, plan 
design changes and required notification of 
change), 

• Payment terms and methodology, and 

• Other duties including distribution of ID cards and 
educational materials. 



98 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 14: Pharmaceutical Pricing and Administrative Fees 



Item 


Standard 


Pharmaceutical pricing - 
Retail 


Pricing and rebates: 

• Brand: AWP minus a % discount + a dispensing fee, or Usual & 
Customary, whichever is less 

• Generic: AWP minus a % discount + a dispensing fee, or 
Maximum Allowable Cost + a dispensing fee, or Usual & 
Customary, whichever is less 

• Rebates: a percentage of all rebates (both direct and market share) 
to client, may include a dollar minimum guarantee per prescription. 

Discounts and dispensing fees are dependent on the retail network 
selected. Rebate share vanes by size of client. Sections 3.2.2 & 3.2.3 
provide additional information on rebates, discounts, and administrative 
fees. 

Payment terms by the client to the PBM for the actual cost of dispensed 
prescriptions is described. Clients reimburse PBMs for the cost of drugs 
through wire transfer or ACH on either a weekly, biweekly, or semi- 
monthly basis in fee-for-service contracts. 

In a capitation or risk sharing agreements the specifics of the PEPM 
premium charged or parameters of the risk shanng arrangement are 
described. 


Pharmaceutical pricing - Mail 


Pricing and rebates: 

• Brand: AWP minus a % discount + a dispensing fee 

• Generic: minus a % discount + a dispensing fee 

• Rebates: a percentage of all rebates (both direct and market share) 
to client. 

Discounts, dispensing fees and rebate share vary by client size. 
Typically, large employers receive 100% of the rebates attnbutable to 
their drug spend. Sections 3.2.2 & 3.2.3 provide additional information 
on rebates, discounts and administrative fees. 


Admmistrative fees (Base 
Services) 


Retail: set amount per prescnption, vanes by client size. 

Mail: set amount per prescription (negotiable, some PBMs charge $0). 
Section 3.2.1 contains additional detail on administrative fees. 

Administrative fees in a fee-for-service agreement are usually billed 
monthly with payment required within 30 days of receipt of invoice. 



99 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 15: Compliance and Security Issues 



Item 


Standard 


Insurance requirements 


PBM are required to maintain comprehensive general 
liability insurance in amounts of SIM per occurrence, 
$3M in aggregate, often listing the client as an additional 
insured. 

Contracts also contain language concerning the 
maintenance of liability insurance by the individual 
pharmacies. Specific limits are usually not stated. 


Indemnification 


Many contracts contain dual indemnification clauses 
with each side indemnifying the other for one party's 
negligence. 


Performance guarantees 
(including monitoring and 
audits) 


Monetary penalties for non-performance up to 50% of 
total administrative fees. Some large clients are now 
negotiating performance guarantees in amounts up to 
100% of administrative fees. 

Section 4.0 provides additional information on 
performance guarantees. 


Right to audit 


Clients maintain the right to conduct an audit of the 
PBMs performance. The audit is the final determinant of 
PBM compliance with any performance guarantees. The 
cost of the audit is borne by the client with the PBM 
agreeing to provide claims data or other information 
required to complete the audit. Most PBMs request 60 
days notice prior to commencing an audit. Claims audits 
require significant preparation by both parties and 
therefore are not practical on an "unannounced" basis. 
Section 3.4.3 contains additional information on the 
various types of audits. 



100 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Employer versus Managed Care or Payer Contracts 

The PBM contract of a single large employer is similar in many ways to the PBM 
contract of a MCO or insurer. The major differences are usually contained in the scope of 
services provided by the PBM and the risk sharing arrangements. 

PBM services 

An employer typically contracts with the PBM to completely manage their drug benefit. 
Some MCOs prefer to maintain responsibility for various aspects of their prescription 
drug program. Typical services performed by the MCO include: 

• Client service; 

• Member service; 

• Manufacturer contracting and rebate administration; and 

• Formulary management. 

Risk Sharing Arrangements 

Large MCOs are more likely to negotiate significant risk sharing arrangements than an 
employer is. This is due to the MCOs desire to work collaboratively with the PBM in 
managing such items as plan design features, cost management and clinical programs. 
Risk sharing arrangements include guarantees on: 

• Per member annual drug spending; 

• Annual trend in drug spending; 

• Specific targets for generic utilization or utilization within each tier of a three-tier 
drug co-pay plan design; and 

• Other risk/reward programs based on the results of various utilization management 
programs. 



101 



92001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 
Public Versus Private Client Contracts 

Public employer (state employee health benefit program) contracts are also very similar 
to private client contracts. The main differences in public employer contracts usually 
center on an increase in regulatory issues and stricter contract terms. Listed below are 
aspects of a common public employer contract that differ from a typical private client 
contract: 

• Contract term - Public contracts usually have a set contract term with a mandatory re- 
bid of the contract at the end of the term. Private client contracts usually remain in- 
force until cancelled by one of the parties. 

• Incorporation of the RFP and RPP response into the contract - Public contracts 
routinely incorporate the RFP, the PBMs proposal, and material correspondence 
during the bid process into the contract. This requires that the PBM have legal review 
of their entire proposal, lengthening the response time required by the PBM to prepare 
their proposal. 

• Fidelity bonds - Many public clients require that the PBM obtain a fidelity bond to 
protect the client from theft or other misuse of public funds by an employee of the 
PBM. 

• Open records regulations - These regulations do not allow the PBM to maintain the 
confidentiality of some of its financial proposals, which may deter a PBM from 
proposing its most aggressive financial arrangements. 

• Choice of law - Most private contracts are adjudicated under the laws of the state, in 
which the PBM resides. Most public contracts are adjudicated under the laws in the 
state in which the public entity resides. 

• Availability of funds - Many public employer contracts are contingent upon the 
availability or appropriation of funds by the governing legislature or board. This will 
occasionally lead to a PBM requiring the client to establish an impress fund for the 
payment of drug costs and administrative fees. Required impress funds range from 
two weeks of estimated claims to 30 days of estimated claims and administrative 
expenses. 

Overall, PBM contracts are similar regardless of the type of entity involved. 



102 



©200 1 , PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 
3.4 Bidding Rules and Selection Criteria 



The procurement of PBM services is a major endeavor for all clients. For this reason, 
most clients follow a comprehensive bidding and selection process. Section 3.4 presents 
the major components of the bidding and selection process and provides examples of the 
processes and methodologies used by major clients today. Diagram 20 represents a 
sample timeline for the bidding and selection process. This timeline is more indicative of 
a new versus renewal bidding process, although the steps are very similar for both. In 
addition, no two employers follow exactly the same steps in exactly the same order. For 
example, some may develop the scoring methodology in conjunction with the 
development of the RPP while other follow the schedule listed below. 



Diagram 20: Sample Bidding and Selection Timeline 



ID 



4n 



Task Name 



Quarter 
Days 




10 



12 



13 



14 



15 



16 



17 



18 



Establish goals/objectives 
Issuance of RFI (optional) 

Development of RFI 

Issuance of RFI and receipt 
by vendor 

Analysis of RFI information 
and selection of vendors to 
receive the entire RFP 
Development of RFP 

Development of questionnaire 
and data requests 

Finalization of RFP document 

Issuance of RFP and receipt 
of proposals 

Issuance of RFP 

Receipt of vendor questions 

Respond to vendor questions 

Proposals due 

Development of scoring 
methodology 

Development of scoring 
methodology 

Selection of evaluation team 

Development of sconng 
procedures 

Development of sconng tools 



19 I Analysis (scoring) of 
! proposals 

I 20 I Initial sconng of proposals 
i i and selection of finalists 

21 Vendor presentations, 
reference venfications, and 

I ■ site visits 

22 Finalize selections 



103 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.4.1 Bidding Overview 

The bidding process encompasses the time from the initial decision to begin a market bid 
process to the actual selection of a PBM vendor(s). The process varies by client type and 
may or may not include the preliminary step of issuing a non-binding request for 
information. There is a wide range of complexity and formality involved in the process 
among employers and payers, with a greater degree of formality present among public 
(government) employers. 

Components of the Bidding Process 

The bidding process involves a number of key components, with varying levels of 
importance to clients. The timeframe for the bidding process will be discussed in a later 
section; however, it should be stated at this point that the timeframe is heavily dependent 
on both the complexity of the process and the number of individuals and/or departments 
involved. 

Key components of the bidding process 

The establishment of goals and objectives is usually the first step in the bidding process. 
This is accomplished when the client establishes the "reasons" they are pursuing a PBM 
market bid and outlines the major services, products, and PBM functions. Typical reasons 
given for conducting a bid process include: 

• Management or reduction in pharmacy cost; 

• Achievement of a greater level of access to pharmacies; 

• Improvement in member/client services; and 

• Achievement of a greater array of pharmacy related services (e.g., mail order, Internet 
pharmacy, etc.). 

Clients' review past PBM experience, such as the frequency of customer services issues. 
After this, they may develop a "wish list" of services, prioritizing items in categories such 
as "must have," "nice to have," etc. In addition, they may look at what other clients are 
doing in this area. Finally, they may examine applicable legislation regarding PBMs. 
Objectives for minimum vendor requirements; geographic coverage, ownership issues, 
etc. are also developed. 



104 



92001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Minimum Vendor Requirements 

Common minimum vendor requirements for large clients include: 

• Five years of service as a PBM; 

• The provision of a pharmacy network meeting the stated access requirements of at 
least 90% of the designated members; 

• A current client with at least 100,000 covered lives; and 

• Acceptable financial results (a client's financial officer usually establishes what they 
believe is necessary for a vendor to meet this objective. Some only require a positive 
audit letter while others review certain financial ratios). 

Government entities often include compliance with specific governmental requirements 
as minimum vendor requirements. 

The development of procurement rules and standards — the specific rules and procedures 
governing the process — are determined and prepared in written format for inclusion in 
the request for information (RFI) and/or the request for proposal (RFP). Private clients 
are far less restrictive, more flexible in applying the rules that govern their market bid 
process, while government clients have more rules and regulations and are 
characteristically stricter and less flexible in applying such rules and procedures. 

As an initial step in the procurement process, many large clients include the development 
of a RFI. The purpose of the RFI is to eliminate some vendors based on minimum vendor 
requirements, services, or coverage. An RFI identifies only those vendors who can 
reasonably meet a client's needs and thus are eligible to receive the comprehensive RFP. 

The development of a request for proposal (RFP) is the formal procurement document for 
both clients. Typically, RFPs are sent and received in an electronic format, although hard 
copy RFPs are still prevalent. In general, a RFP is presented to potential vendors in a way 
that makes the needs of the client easily understood. The RFP usually contains the 
following broad sections: 

1 . Background information - The key information concerning the client and its covered 
population. This section identifies who the client is, a brief description of the 
demographic and geographic make-up of the covered population, and any pertinent client 
history. 



105 



C2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

2. The goals and purpose of the RFP - A succinctly written statement that sets the 
context for the RFP. 

3. A description of the benefit plan design and program features - This section explains 
to the potential bidder the exact product they are bidding on. Type of program financing 
(ASO, capitation, etc.), desired services such as prior authorization, various forms of 
utilization management, and the management of the formulary are described. This section 
also lists requirements for customer service, reporting, and other administrative functions. 

4. Minimum vendor requirements - The list of requirements that a vendor must meet in 
order to be considered. Requirements may include years of operation, size of current 
clients under contract, geographic coverage, etc. 

5. Bidding rules and timeline - This section discusses any pertinent rules for the bidders 
to follow and includes information on submitting vendor questions, contact with client 
staff, etc. A timeline outlining key dates in the bidding process is also presented. 

6. Questionnaire - This section includes various information requests including: 

• General information and organizational background; 

• Network operations and coverage; 

• Plan design, quality assurance, and formulary issues; 

• Client/member services; 

• Claims administration; 

• System capabilities and interface; 

• Pharmaceutical pricing and rebates; 

• Reporting and data analysis; 

• Utilization management; 

• Legal and liability issues; 

• Implementation support; 

• References; 



106 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• Financial-related questions and banking issues; and 

• Contract compliance and performance measures. 

7. Administrative fee quote - The PBM's cost for providing services to the client. Most 
administrative fees are based on a per prescription basis, but some insurers (e.g. 
CIGNA, Aetna) base their administrative fees on a PEPM basis. Usually, the outline 
of a financial exhibit is provided in the RFP. The PBMs fill in the exhibit with their 
administrative fee quotes and describe the basis of the quote (e.g. per script). Separate 
quotes are obtained for electronic and paper claims, along with both retail and mail 
order claims. 

The PBM is asked to identify all services included in their base administrative fee and 
to provide the cost and the cost basis (e.g. per prior authorization review) of any 
additional services. Many employers request administrative fee guarantees for the 
initial term of the contract (usually 3-5 years) and include a question dealing with the 
PBM's willingness to guarantee its rates in this section. 

Information Provided to Bidders 

Demosraphics 

In order for bidders to respond to the potential client's questions, they must be provided 
with information that will enable the bidders to develop credible responses. At a 
minimum, bidders are supplied with member demographic information, the total number 
of covered lives, their residence zip codes, and an age/sex listing. Bidders use this 
information to perform geo-access analyses that determine the percent of a potential 
client's covered lives within a specific number of miles from the closest network 
pharmacy. 

Utilization/cost management 

Most bidders desire two years of claims data and any statistics available on service 
utilization such as the number of telephone calls to customer service, number of prior 
authorizations, etc. This information is needed to generate a fee quote and to estimate 
customer service personnel requirements. For an ASO bid, there will be less of a need for 
the bidders to receive claims information; bidders will not be at risk for the drug spend. 
Most ASO bidders can use demographic information to forecast their administrative 
costs. 



107 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

System interfaces 

System requirements are important if the PBMs need to communicate with the various 
parties involved with the PBM. These parties might include the client's third party 
administrator for the medical benefits and/or the client's data management vendor. 
Potential PBMs need to know the record layouts and the means of communicating with 
the client's other vendors. 

Contract issues 

Many clients will include a copy of a proposed contract in the RFP in order to give the 
bidders the opportunity to suggest changes or to indicate their inability to meet certain 
contractual obligations. Some clients use the PBM's comments concerning adherence to 
the proposed contract as a selection criterion. It is common for government entities to 
include these contracts, citing specific aspects of the contract that must be adhered to in 
order to do business with them. Government entities, particularly states, may also include 
any applicable regulatory language. 

3.4.2 The PBM Selection Process and Criteria 

The Composition of the Selection Team 

The composition of the selection team can be critical in accurately assessing the best 
PBM for a specific client's needs. The private and public sectors rely on varying levels of 
expertise in analyzing competing proposals. 

Many private sector clients understand the PBM industry and feel comfortable in 
reviewing the various proposals. Other private sector clients rely on the expertise of 
employee benefits consultants to review all aspects of the proposals or to review the more 
technical components of the proposal such as utilization management, pharmaceutical 
pricing, rebates, and administrative fees. 

Public sector clients also review proposals using a variety of personnel. Some will form 
multi-disciplinary review teams with personnel from various departments within the 
entity (employee benefits personnel, systems personnel, medical personnel, finance 
personnel, etc.), while others will have the review contained within a single department. 
Again, some public sector clients use consultants to analyze all aspects of the proposals 
(or specific sections) and recommend the best choice. 

In general, a mix of clinical personnel, financial personnel, systems personnel, and 
operations personnel are required to adequately review a PBM proposal. While all of 



108 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

these areas are important, a number of clients we interviewed view a familiarity with the 
benefits structure that the PBM will be operating in as most important. This is 
particularly important for clinical personnel, who should also be familiar with issues such 
as formulary management or therapeutic switching methodology. Financial personnel 
should understand the underpinnings of the PBM industry, and how PBMs make money. 
Systems personnel are especially important if the PBM will need to interface with other 
vendors. 

If a capitation or significant risk sharing agreement is being considered, additional 
personnel including actuarial and underwriting personnel should be involved in the 
selection process. 

The Scoring and Analysis of Proposals 

As stated earlier, clients employ a variety of approaches in evaluating potential PBM 
vendors. The scoring and analysis of proposals is no exception to this. Some use an 
elaborate scoring matrix while others use none at all. For those that use a scoring matrix, 
it is usually developed in a manner that assigns various weights to identified sections of 
the RPP based on their relative importance to the client. The scoring matrix can be 
electronically tied to the proposal received if an appropriately written electronic version 
of a RFP is issued. 

Within each section, the question or data elements are assigned a maximum score. The 
score may be the same for each element, or each item may be assigned a different 
maximum score based on its importance within the section. The importance of each 
section is based on individual client needs and preferences and will vary by client. The 
importance (weight) assigned to each section usually is in line with the stated goals and 
objectives of the bid process. 

Generally, private clients use a less detailed, less complex scoring methodology than 
public sector clients do for two reasons. First, private clients tend to have adequate 
knowledge about the industry to evaluate the non-price aspects of the proposals, and may 
want to focus their attention on pricing issues and network composition. Second, public 
clients may be bound by a more formal bidding process, which requires a quantitative 
scoring method. 

If an RFI is not used to eliminate some vendors, then the scoring methodology can be 
developed to eliminate bidders who do not receive a minimum score on a specific section 
or combination of sections of the RFP. Minimum vendor qualifications, compliance with 
contractual issues, and geographic network coverage are the usual areas that are used to 
initially eliminate bidders. 



109 



S200I, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Many clients further pare the Hst of bidders through the selection of finalists. Depending 
on the number of overall bidders, there are usually 2-4 finalists selected. One method of 
selecting finalists is to establish a target score for finalists; those vendors reaching the 
target score or higher are considered finalists. Vendor presentations, site-visits, and 
reference verifications are usually reserved for finalists. 

Standard RFP Sections, Weighting and Evaluation Criteria 

Table 16 compares the weighting by component contained in recent PwC PBM market 
bids with the average overall importance ranking based on information gathered during 
PwC's discussions with PBM clients for this study. The RFP weighting emphasizes the 
overall importance of the pharmaceutical discounts and rebates due to their material 
impact on the cost of a prescription drug benefit. The significant weighting on discounts 
and rebates also is indicative of most clients' concern about the cost of the prescription 
drug benefit. 



Table 16: Relative Importance of RFP Sections 



RFP Section 


RFP 


PBM Client 




Weighting 


Ranking 


Pharmaceutical Pricing and 


35% 


1 


Rebates 






Administrative Functions 


20% 


4 


Performance Guarantees 


15% 


6 


Retail Pharmacy Access 


8% 


2 


Clinical/Utilization Management 


5% 


5 


Administrative Pricing 


5% 


3 


Quality Indicators 


5% 


7 



In PwC's discussions with clients, price and access were the two most important 
considerations. While performance guarantees are often an integral part of the bidding 
and selection process, they rank next to last in importance. This is probably the case for 
two reasons: 1) they are generally measured only periodically (many times just once a 
year); and 2) clients are more interested in receiving high quality service than collecting 
fees that will not offset the harm caused by a vendor's inferior performance. 

Network pharmacy access has a relatively low weight in the RFP process, even though it 
is important to the PBM's clients, because almost all major PBMs have very extensive 



110 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

networks and therefore there is very little differentiation in this area among the national 
PBMs. 

Administrative pricing also has a low weight due to the fact that the cost of administering 
the pharmacy benefit is minimal compared to the actual cost of the pharmaceuticals 
dispensed. Administrative services are weighted higher in the PwC model, as the 
administration of the benefit plan is the main function of the PBM. The fact that it 
ranked lower in importance may be a sign that PBMs, in general, perform their functions 
well and that level of service has come to be expected by the PBM's clients. Most 
clients, with whom PwC held discussions, believed that the administrative pricing and 
administrative fiinctions were very similar in importance. 

The individuals PwC spoke with were asked whether the criteria used in selecting a PBM 
to serve a primarily senior population would vary from their own criteria. The general 
feeling was that while cost would remain the overriding issue, customer service for the 
elderly will increase significantly in importance. In addition, mail order capabilities may 
become more important, given the presence of chronic conditions found in the elderly 
population. While some tout online capabilities as important for seniors, others feel that 
at the present time the senior population is not ready to rely on online services. 

The sub-sections that follow identify key issues and statistics commonly used in 
evaluating the pharmaceutical pricing, pharmacy access, and administrative fees 
contained in a bid response from a PBM. The remaining evaluation areas are less uniform 
in the criteria used for evaluation, and vary based on the goals of the client. 

Pharmaceutical pricing 

Pharmaceutical pricing in both the retail and mail order environment is usually not based 
on the actual price of a specific pharmaceutical, but on the discount scheme proposed by 
the PBM. Discounts on brand pharmaceuticals are usually bid as a percentage off the 
pharmaceutical's average wholesale price (AWP). Generic pharmaceuticals are usually 
proposed based on their MAC cost, but may also be stated as a percentage discount from 
AWP. A requirement that the lesser of the negotiated discount price or the pharmacy's 
"usual and customary" (U&C) price is analyzed in this area. 

Based on recent PwC market bids the average discounts are as follows: 

• Retail brand: AWP - 1 2% to 1 5% 

• Mail order brand: AWP - 1 8% to 23% 



111 



B2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• Generics: most generic pharmaceuticals use a MAC pricing schedule. The 
combination of generic pharmaceuticals with MAC pricing and those without MAC 
pricing average discounts of approximately AWP - 50% to 60% for both retail and 
mail order pharmaceuticals. 

• Many PBMs use the HCFA MAC pricing schedule, while most of the largest PBMs 
have developed their own MAC pricing schedule. 

Dispensing fees 

Pharmaceutical pricing in the retail environment also includes a dispensing fee that is in 
addition to the discounted cost of the pharmaceutical. Dispensing fees in the retail 
environment for most large clients usually range from $2.00-53.00 per prescription. 
Some governmental entities may pay in excess of $4.00 for dispensing fees and a small 
number of MCOs will pay below $2.00 for dispensing fees. 

Some PBMs charge a dispensing fee for their mail order services; this is a negotiable 
point. Mail order dispensing fees range from $0-$2.00 per prescription. 

Manufacturer rebates 

PBMs provide rebate guarantees averaging between $0.85-$l .25 per prescription to their 
clients. The pharmaceutical manufacturer actually pays the rebates to the PBMs based on 
percentage of the drug cost and the PBMs "pass through" the rebates to their clients 
based on their agreed upon terms. PBMs may vary the way they "pass through" rebates 
to their clients. Rebates can be on all prescriptions, some propose a guarantee based on 
all retail prescriptions, some propose rebates based on all brand prescriptions, some 
provide rebates for only formulary prescriptions, and some vary the level of rebate 
between retail and mail order. 

Pharmacy access 

Pharmacy access is analyzed (scored) based on established access criteria and the 
percentage of members meeting the access requirement when compared to a PBM's 
proposed network. Most PBMs offer extensive networks and this is generally not a 
differentiating factor in selecting a PBM. Clients generally look at whether the PBM has 
the major retail chains in its network for its relevant service areas. Clients with members 
in more rural areas look to the PBMs' flexibility in adding non-chain pharmacies in local 
communities. Section 4.2.3 provides a description of standard pharmacy access standards 



112 



52001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Administrative fee arrangements 

Administrative fees in the retail environment are most commonly based on a per 
prescription basis. Most clients prefer a bundled administrative fee with a majority of the 
basic administrative services included in the per prescription fee. Additional 
administrative fees may be charged for specialty programs such as disease management, 
prior authorization programs, some levels of utilization management, and ad-hoc 
reporting. Statistics are developed from prior client experience or based on industry 
norms for each administrative category in order to assure an equal comparison of the 
vendors' proposals and a fair analysis. 

Administrative fees for mail order prescriptions vary by PBM with some charging no 
administrative fees for mail order. A detailed description of administrative fees is 
contained in Section 3.2.1 of this report. 

Other Components of the Selection Process 

Vendor presentations, site visits, and reference verifications generally take place after the 
client has identified a set of finalists or semi-finalists. These presentations are used to 
provide vendors the ability to discuss their services in person. In addition, these 
presentations can be used to: 1) verify the information presented in the RFP; 2) gauge the 
interpersonal relationship between the vendor and the client; and 3) solicit "best and 
final" offers. Potential clients usually request that the vendor's account management team 
is present at interviews, rather than the vendor's sales representatives. 

Site visits to operations centers, mail order facilities, etc. are used to verify that the 
services described in the RFP are actually in operation and working as described. Clients 
view site visits with varying levels of importance. Aside from onsite verification, the 
visits can serve as an educational tool in learning about the latest technologies at both call 
centers and mail order facilities. However, some potential clients feel that they have 
sufficient knowledge about the PBM industry to avoid the expense of site visits. 

Finally, reference verifications are used to verify the service performance of a vendor. 
While private clients certainly view this as an important step in the process, public clients 
may incorporate references into the selection scoring process. In addition, private clients 
may utilize their "network" of counterparts working in similar functions at other clients 
to discuss the service provided by various PBMs. 



113 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Bidding and Selection Timeline 

The bidding and selection timeline illustrated in Diagram 17 is for a large, complex PBM 
client. The size of the Medicare population, the number of regions to be bid and the 
requisite approval requirements within the HCFA procurement process will impact this 
timeline. During our discussions, clients and PBMs were asked to estimate the HCFA 
bidding and selection process. The general feeling was that the process would take 9-12 
months, given the potential scope of the program and the vendor selection requirements 
inherent in a federal program. 

The total process outlined in Diagram 1 7 can take anywhere from 4 months to a year, 
depending on a number of factors, with most large clients falling in the 4-8 month range. 
Factors affecting this timeline are described below: 

• Establishment of goals and objectives - This can take longer than 30 days when 
multiple decision-makers are involved in the process, or when a public oversight 
board is involved. 

• Issuance of RFI - In some cases, a client will place more emphasis on the RFI and 
include a more comprehensive list of questions, which will take more time to produce. 

• Development of RFP - As is the case with step one, if multiple parties are involved 
and board approval is required, the development process can take longer. 

• Issuance of RFP and receipt of proposals - If the RFP is complex or requires 
capitation or significant risk sharing, vendors must be given more time to respond. In 
addition, if the RFP and the PBM's proposal will become part of the contract, 
additional time is required by the PBM to obtain all necessary legal review of their 
proposal. 

• Development of scoring methodology - The more detailed the scoring is, the longer it 
will take to develop. 

• Analysis (scoring) of proposals - In some instances, multiple parties must be involved 
in the scoring process, which will stretch out the process. 



114 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.4.3 Implementation Process 

Implementation Time Line 

The typical large client implementation time line is 90 days from contract acceptance to 
"going live" with the benefit. PBMs commonly state that they can implement a program 
within 60-90 days for large clients. However, government entities usually require a six- 
month implementation schedule due to their size and complexity. At a recent workshop, 
many PBM representatives estimated that due to the complexity of the Medicare program 
it may take as long as one year to adequately implement a prescription drug benefit. This 
estimate was reinforced in discussions with clients and PBMs, during which a number of 
respondents stated that it would take at least one year to implement the program. Diagram 
21 displays a typical 90-day implementation timeline for a private PBM client. 



115 



52001, PncewaterhouseCoopers LLP 



■1 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 21: Typical 90-Day Implementation Schedule - January 1 Start-Up 



Task Name 



October 



November 



December 



January 



36 



37 



Initial implementation meeting 

Benefit plan design 

Determine plan design (covered/excluded drugs, prior 
authorization, etc.) 

Determine process for member submitted ciairTB 

Determine mail service plan parameters 

Pharmacy network 

Identify netw ork needs other special needs 

Development of pharmacy netw ork including recruitment, 
development and distribution of pharmacy communications. 



38 



Interconnectivity 

Determine configuration and dial-up procedures 
Deternine hardw are/softw are requirements 
Install hardw are/softw are 
Conduct testing 
Communications 

Review communication requirements 
Design and create cards & announcements 
Devetop other communication nnaterials 
Bigibility 

Determine eiigibilrty requirements 
Load member eligibility file 
Create on-line eligibility, if applicable 
Create manual eligibility process 
Management Reporting 

Determine reporting requirements 
Set-up reports 
Customer Service / Call Center 

Determine customer services processes and requirements 
Train call center team 
Set-up call center 
Financial Requirements 
Set-up payment terms 
Determine billing report format 
Legal/Contract 
Rnalize contract 
Obtain signatures 
i Post Implementation 

Conduct post-implementation meetings 
Revise processes as needed 





116 



£2001, PncewaterhouseCcKjpers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Factors Affecting the Implementation Timeline 

There are a number of key milestones in the implementation process that need to be 
achieved in order to for a PBM to be implemented. This information was augmented by 
PwC's discussions with clients. Factors affecting the implementation timeline are 
discussed below, with an emphasis on large client implementations, as these more closely 
resemble HCFA's size and complexity. 

Information systems and interconnectivity 

One of the more important drivers in the implementation process is the installation of the 
system(s) used to administer the plan. These systems must be set up to accommodate the 
plan parameters, pricing arrangements, and integrate with functions such as eligibility, 
billing, and reporting. The information technology capabilities of both the client and 
vendor can impact the implementation time. 

Benefit plan design 

Multiple plan designs increase the required implementation time for this set of tasks. 
Employers with multiple subdivisions and plan designs can take longer to implement. 
Insurers with a multitude of options must be comfortable with the PBMs ability to deal 
with these complexities. Several entities participating in the study suggested that HCFA 
could simplify the system installation step in the process by limiting the number of drug 
plan design options it offers Medicare beneficiaries. 

Coordination with Existing Employer Benefit Plans 

Currently Medicare coverage is secondary when coverage from an employer's benefit 
plan is in force. Through legislation or policy the classification of the Medicare 
prescription drug benefit as primary or secondary will need to be established. An internal 
PwC report on the Medicare prescription drug benefit proposed by the Clinton 
Administration indicated that approximately 25% of employers would drop their 
prescription drug benefit if Medicare implemented a prescription drug benefit. The 
remaining employers may alter their existing benefit thereby pushing a majority of the 
cost into the Medicare program. 

The degree (if at all) to which the Medicare program coordinates benefits with existing 
employer plans will need to be determined and the appropriate systems established within 
the selected PBM to accommodate the agreed upon procedures. 



117 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Eligibility 

The eligibility verification and transfer processes are important components of the system 
installation process. Interfaces must be developed which take into account functions such 
as claims processing, card production, and the mailing of communication materials to 
members. It is much simpler to work with a centralized eligibility file than multiple files 
from multiple sources. The complexity of a client's eligibility files can also have a major 
impact on the implementation timeline. Based on discussions with clients and PBMs, it 
was suggested that HCFA attempt to consolidate eligibility data in a single source of 
transmission to the PBM. 

Member communications and customer call center 

Member communications are another important implementation step. Most clients 
interviewed were comfortable with the process and did not personally experience any 
major stumbling blocks. However, when asked about the implications of introducing a 
prescription drug plan to Medicare beneficiaries, the consensus was that a comprehensive 
communication plan should be developed for beneficiaries and network pharmacies. 

Lesal/contract 

Several clients commented that the process of executing a contract with a PBM could be 
a long, drawn-out process. All applicable plan design requirements, performance 
guarantees, and other specifics for the program must be spelled out and agreed to by both 
parties. Public clients tend to have vendor-contracting requirements that reduce flexibility 
in reaching a mutually agreeable document. The contracting process could become 
especially time consuming in dealing with a program of the size and scope of Medicare. 

Pharmacy network, management reporting and financial requirements 

Several clients mentioned other factors that could affect the implementation timeline. 
First, any required changes to the PBM's pharmacy network to accommodate a new 
program could affect the speed of implementation. This is common when a client wishes 
to minimize employee disruption in terms of pharmacies utilized. Second, the PBM and 
the client must agree on the type of reports generated for the client's program, including 
both standard and ad hoc reports both of which provide an easy interpretation of areas 
such as the status of program costs and utilization factors. Finally, the PBM and the client 
must work out details of the medium, format, and accounting requirements of the 
invoices sent to the client by the PBM. 



118 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Client responsibilities 

While it is ultimately the PBM's responsibility to meet implementation deadlines, the 
ability to implement a new program is also heavily dependent on a client's 
responsiveness to the PBM's requests. Factors that are particularly important, as stated in 
PBM proposals, include: 1) the availability of technical staff to assist with system setup; 
2) the timely provision of eligibility information; 3) the availability of business staff to 
answer PBM questions and respond to information requests; and 4) the ability of the 
client to make timely decisions. It is equally important for the PBM to clearly understand 
the client's specific needs. 

Given the magnitude of the Medicare program, HCFA would need to ensure that the 
factors stated above are addressed, and that an adequate number of qualified individuals 
be assigned to the implementation team. 

Member Communications Timeline 

The timeline for member communications during the implementation process, from 
establishing the communication's requirements to mailing member packets, averages 90 
days for clients, and starts at the beginning of the implementation schedule. Key 
milestones include: 

• The identification of client-specific communications requirements; 

• The creation of an announcement letter, informing members of the upcoming change; 

• The preparation of a mail service profile, spelling out the parameters of the types of 
mailings, timing, quantities, and any other special mailing instructions; 

• The creation of toll-free member and pharmacy numbers (often client-specific); 

• The design of an ID card; 

• Client sign-off on materials for distribution; and 

• The mailing of materials 1 5 days prior to implementation. 

As stated earlier, the member communications timeline would need to be expanded well 
beyond 90 days for the Medicare population, and may also need to include a public 
relations and/or advertising campaign. 



119 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

The Effect on Implementation of the Number of Members in a Plan 

Based on client interviews, the number of members did not routinely affect an 
implementation timeline. However, it was stated that a program as large, and possibly 
complex, as Medicare would likely have an impact on the time required for 
implementation. For example, the customer service function of the PBM(s) contracted 
would likely require expansion and special training to deal with the senior population. 
Mail order volume could grow significantly. Other functions such as ID card production 
and aspects of member communications could also be impacted. 

The degree of impact the Medicare population has on the implementation timeline is 
somewhat dependent on the number of PBMs selected to administer the program. 
Splitting the Medicare population across several PBMs would be likely to have less of an 
impact than concentrating the business in one PBM. 

The Member's Effect on the Implementation Process 

Member demographics and a member's prior experience with drug benefits can impact 
the implementation timeline. Member demographics (language, education level, etc.) 
may affect member communications vehicles, ID card production, and customer service 
requirements. A member's prior experience with drug benefit programs can dictate the 
amount of up- front member education. The individuals interviewed for this study agreed 
that special consideration would need to be made in addressing the needs of the senior 
population, particularly in the areas of member communication and customer service. 

Another consideration is the multi-lingual composition of the Medicare-eligible 
population. Most PBMs have Spanish-speaking representatives on-site at their call 
centers. Some PBMs state that they will "work closely" to develop and implement 
specific programs targeted to non-English-speaking populations. Others utilize a 
language line service such as AT&T, which has translators available in 140 languages. 

Implementation Issues and Success Factors 

Listed below is a summary of key implementation tasks that are important to a timely and 
successful implementation: 

• Ongoing implementation review meetings to assess goals, schedules, and 
deliverables; 

• Internal account team status meetings to discuss program requirements with 
operations managers; 

• Implementation status reports every two weeks; and 



120 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

• Bimonthly internal post-implementation problem resolution meetings. 

A number of other insights were gained during our discussions with clients. One client 
stated that the most important factor is having the right people on the implementation 
team, including those who have the authority to get additional resources if needed. 
Communication between the vendor and client is critical, and they need to understand 
each other's terminology. Communicating via e-mail is seen as a recent improvement in 
the process. 

Several clients stated that a primary reason they considered their PBM implementation to 
be successful was that the PBM was staying one step ahead in the process, providing the 
client with timely reminders of upcoming deadlines and responsibilities. Finally, if the 
client has online access to the PBM's system, then adequate training in using the system 
is very important. 

Implementation incentives 

It is common practice for PBMs to agree to implementation incentives (bonds, 
guarantees, etc.). These can either be imposed by the potential client, or asked for as part 
of the bidding process. Performance incentives range from a set dollar amount ($100,000 
in the case of one state government) to daily or weekly fees for missing the start date. The 
magnitude of the guarantee is based on number of covered lives. 

Other clients require PBMs to agree to penalties for missing specific implementation 
milestones. Generally penalties range from $5,000 per milestone, with a maximum of 
$25,000 for implementation guarantees. On the high end, one PBM offered to pay 
$10,000 to $30,000 per milestone, and up to 20% of annual administrative fees. 

Implementation credits 

Some PBMs offer an implementation credit to a client to cover specific costs related to 
the implementation process. Costs covered include a client's staff time, consultant's fees, 
system upgrades, and other related costs. This credit is based either on a per employee 
basis or a flat amount. Per employee credits range from $1 .00-$ 1 .50 per employee. Flat 
amounts will vary based on the size of the client. The credit is usually offered when a 
potential customer switches from another vendor to the PBM offering the credit. 



121 



£2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Post Implementation Monitoring 

As described in Section 4.2.1 ("Administrative Performance Benchmarks and 
Guarantees"), PBMs monitor their own performance utilizing a number of techniques, 
ranging from automated call monitoring systems to mail surveys. However, many clients 
hire third party auditors to assist in post-implementation monitoring. 

Client claims audits are the most common form of external measurement of PBM 
performance. Guidelines for these audits are frequently established in the service contract 
between the PBM and the client. The client usually hires a third party to conduct the 
audit. 

The protocols established in the contract between the client and the PBM generally 
provide the details for how the client and the third party auditor will interface with the 
PBM. PBMs usually require 60-day notice of an audit and may exclude a time period 
such as December-January. Clients may try to negotiate the reimbursement for 
conducting the audit, but PBMs prefer to have it stipulated in their contract that audit 
expenses are borne by the client. 

The third party auditor develops a systematic approach to conducting the audit. Claim 
audits fall in the general category of discovery audits, and are the preferred type of audit 
because they: 1) require relatively minimal time and financial investment; 2) 
validate/invalidate vendor relationships; 3) uncover areas for process improvement; 4) 
satisfy the plan sponsors' financial and fiduciary objectives; and 5) allow for 
modification of audit size and scope to meet the budgetary constraints of plan sponsors of 
any size. ''^ 

Typically, the audit helps to uncover: 

• Inappropriate discounts off the average wholesale price and dispensing fees; 

• Ingredient cost errors stemming from inaccurate conversions of units of measure for 
products like inhalers, topicals, and compounded medications; 

• Coverage of non-covered drugs; 

• Routine coverage of drugs requiring prior authorizations without proper 
documentation; and 



Peard, Susan, et al, "Taking Stock of your PBM," Business and Health 18 no. 3 (March 2000): 43-47. 



122 



£2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



• Eligibility problems, such as ineligible employees receiving coverage, claims being 
filed under the wrong members, and in some cases, legitimate enrollees being denied 
coverage/^ 

Rebate verification audits may also be conducted during the course of the discovery audit 
described above or as a separate audit. Contracts between drug manufacturers and the 
PBM are reviewed and the PBM's accounting procedures are checked to ensure that the 
appropriate rebates are being received/'^ Audits are generally conducted once every 1-3 
years, based in part on the performance of the PBM. Due to the size of the Medicare 
population, more frequent rebate audits may be necessary. 

In general, rebate audits include: 

• A review and analysis of the methodology used by the PBM to allocate rebates to its 
clients; 

• Identification of the top manufacturers (usually 3 or 4) that represent a majority of the 
rebates due a client; 

• Performance of a detailed analysis of the PBM's contracts with the top manufacturers; 

• A review and verification of the PBM's calculations concerning the rebates owed by 
the manufacturers and the allocation of those rebates to the client; and 



Verification of the PBM's compliance with any contractual performance guarantees 
relating to rebates. 



The overall goal of the rebate audit is to assure that the client is receiving the appropriate 
amount of rebate dollars and to verify contract compliance. Due to the degree of data and 
information required to conduct a rebate audit, the audit is usually scheduled well in 
advance and not performed on an unannounced basis. 



" Ibid., 44 
Ibid., 47 



123 



52001. PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

3.4.4. Medicare Selection/Implementation Schedule 

In discussions with clients and PBMs, most agreed that due to the size and complexity of 
the Medicare program an elongated selection and implementation process would be 
required. Most believed it would take up to two years for Medicare to complete the 
vendor selection and program implementation process. Based on the discussions with 
clients and PBMs, PwC prepared a sample twelve month bidding/selection timeline and a 
twelve month implementation timeline. Diagrams 22 and 23 on the following pages 
illustrate the combined twenty-four month timeline. 



124 



S2001, PricewalerhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 22: Sample Medicare Twelve Month Bidding/Selection Timeline 









1st Quarter | 2nd Quarter ' 3rd Quarter 


4th Quarter 


ID 


Task Name 


Days 


Jan 1 Feb | Mar \ Apr j May ; Jun i Jul | Aug | Sep 


Oct ■ Nov i Dec 


1 


Establish goals/objectives 


60 







I 8 



Issuance of RFI (optional) 90 

Development of RFI 1 5 

Issuance of RFI and receipt 45 
by vendor 

Analysis of RFI information 30 
and selection of vendors to 
receive the entire RFP 
Development of RFP 90 

Development of questionnaire 60 
and data requests 

Finalization of RFP document 30 
based on input from RFI 



9 


Issuance of RFP and receipt 
of proposals 


91 


10 


Issuance of RFP 


1 


11 


Receipt of vendor questions 


30 


12 


Respond to vendor questions 


15 


13 


Proposals due 


45 


hiH 

i 


Development of scoring 
methodology 


45 


; 15 


Development of scoring 
methodology 


45 


! 16 
i 


Selection of evaluation team 


45 


i 17 


Development of scoring 
procedures 


45 


: 18 


Development of scoring tools 


45 


i 19 

j 


Analysis (scoring) of 
proposals 


120 


i 


Initial scoring of proposals 
and selection of finalists 


45 


; 21 


Vendor presentations, 


45 



22 



reference verifications, and 
site visits 

Finalize selections 



30 





125 



£2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Diagram 23: Sample Medicare Twelve Month Implementation Schedule 



Task Name 



Days 



1st Quarter 



Jan Feb Mar 



2nd Quarter 



3rd Quarter 



Apr I May | Jun \ Jul | Aug [ Sep' 



4th Quarter 



1st Qb 



Oct Nov Dec | Jan 



Initial implementation meeting 
Benefit plan design 

Determine plan design (covered/excluded drugs, prior 
authorization, etc ) 

Determine process for member subnritted claims 
Determine mail service plan parameters 
Pharmacy network 

Identify netw ork needs other special needs 
Devetopment of pharmacy netw ork including recruitment, 
development and distributk}n of pharmacy communications. 

Interconnectivity 

Deternrine conf iguratnn and dial-up procedures 
Determine hardw are/softw are requirements 
kistat hardw are/softw are 
Conduct testing 
Com m unications 



Review communicatnn requirements 

Design .create, and distribute cards & announcements 

Devetop and distribute communk:ation materials 
Bigibility 

Determine eligibility requirements 

Load and test member eligibility file 

Create on-line eligibility, if applicable 

Create manual eligibility process 
Management Reporting 

Determine reporting requirements 

Set-up reports 

Test report system 
Customer Service / Call Center 

Deterrrine customer services processes and requirements 

Staff and train caH center team 

Set-up call center 
Rnancial Requirements 

Set-up payment terms 

Deterrrine billing report f orrrat 
Legal/Contract 

Finalize contract 

Obtain signatures 
Post Implementation 

Conduct post-implementatkan meetings 

Revise processes as needed 



1 

270 

90 

90 
90 

360 
60 

300 

360 

90 
90 
90 

365 

60 

losi 

300 ' 
300 

60 
210 
180 

30 
270 
' 90 

90 

90 
365 

90 
275 
275 
180 
1 80 
180 
180 
150 

30 
Start 



126 



B200I, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Medicare Bidding and Selection - Additional Time Required 

The tAvelve-month timeline recognizes that additional time may be needed to finalize the 
RFP and to perform a complete analysis of the proposals received. The twelve month 
timeline (Diagram 22) varies from the ninety-day timeline (Diagram 21) in the following 
ways: 

• Expands the time allocated for the issuance of the RFI and receipt of responses from 
the PBMs. The additional time will be used to answer PBM questions concerning the 
RFI and to allow the PBMs more time to submit their response. 

• Allows for additional RPP preparation time. Additional time may be required to 
obtain the necessary reviews of the RFP and approval to issue the RFP. 

• Provides for additional time to perform the analysis of the proposals received from the 
PBMs. The additional time will be needed to clarify the responses from the PBM, 
pose follow-up questions, allow for multiple site visits to call centers and mail order 
facilities and in general to provide additional time to complete the analysis and obtain 
required approvals. 

Medicare Implementation - Additional Time Required 

The twelve-month Medicare timeline (Diagram 23) is significantly longer that the usual 
90-day implementation timeline (Diagram 21). The longer timeline is indicative of the 
belief that implementing a Medicare prescription drug benefit will require extensive 
member and pharmacy communications and that the success of the program will be 
dependent on a successful communications program. The twelve-month timeline varies 
from the 90-day timeline in the following ways: 

• Significant expansion of the time allocated for both member and participating 
pharmacy communication. A significant communications effort will be required to 
assure that the members and the pharmacies are well versed on the program's benefits 
and the claims submission procedures. 

• Allows for additional time to finalize and test the claims submission systems and 
procedures. 

• Provides for additional time to finalize the PBM contracts and obtain required 
approvals. 



127 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



• Anticipates that additional time will be required by the PBM to hire and train their 
customer service personnel. Anticipates additional training will be required to orient 
customer service personnel to the needs and challenges of a senior population. 

The actual time needed to bid, select and implement a Medicare drug benefit is dependent 
on the number of PBMs evaluated, complexity of the drug benefit, and beneficiary 
criteria. In addition, HCFA may require additional time to develop new, internal 
programs to align with the PBM's service. These could include managing enrollment and 
eligibility, collecting premiums, as well as monitoring, and possibly managing, utilization 
and cost. 



128 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



4.0 PERFORMANCE MEASUREMENT 

Performance measurement is a key function for clients as they assess their ongoing 
relationship with their PBM. Traditionally, performance measurement is divided into the 
following two categories: 

• Cost and utilization; and 

• PBM service performance. 

Cost and utilization performance measurement includes such metrics as the number of 
prescriptions dispensed per member, average ingredient cost per prescription and per 
member, generic use rates, and rebates. Cost and utilization results may vary 
significantly by client based on the client's demographics and the client's overall benefit 
plan design. 

Conversely, PBM service performance measurements are more uniform. Clients have 
established a series of benchmarks and service guarantees to measure the overall service 
performance of a PBM. Many of the service guarantees were derived from the guarantees 
used by medical claims administrators. Service guarantees deal primarily with the 
administrative aspects of a PBM's performance, as this is the main service provided by 
the PBM. Since PBMs do not manufacturer, prescribe and dispense drugs (with the 
exception of mail order), the service performance measurements are the main "quality" 
measurement for a PBM. In almost all cases, the monitoring of performance measures is 
performed and paid for by the PBM. 

This section includes an overview of common cost and utilization statistics and PBM 
service performance measurements routinely used by clients today. A description of 
some of the variables that may impact these statistics is also provided. In addition, an 
overall evaluation of the PBM industry's performance, based on recent survey material, is 
presented. 



129 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

4.1 Cost and Utilization Measurements 

Most clients monitor similar cost and utilization statistics. The statistics are monitored to 
determine trends in drug utilization and the impact of various plan design changes. 
Common measurements used to monitor a prescription drug benefit program include: 

• Number of prescriptions dispensed per member; 

• Generic use rate; 

• Average ingredient cost per prescription; and 

• Average annual cost per member (after co-pay and including dispensing fee). 

Although the statistics monitored by clients is similar, the results achieved vary greatly 
based on the demographics of the client's covered population and the overall benefit plan 
design. As a result, it can be difficult to compare statistics. Table 1 7 provides a range of 
results achieved during 1999 by various clients with whom PwC held discussions. 



Table 17: Range of Results for Common Cost and Utilization Measurements 



Measurement Statistic 
(per year) 


Range of Results 
(1999 Data) 


Number of Prescriptions per Member 


10.4-13.6 


Generic Use Rate (% of total drugs dispensed) 


37.2% -38.4% 


Average Ingredient Cost per Prescription 


$33.83 - $44.65 


Average Annual Cost per Member (after copay 
and including dispensing fee) 


$130.68 -$381.73 



As mentioned above, population demographics and plan design can have a significant 
impact on comparative statistics. Below are some of the causes for these variations. 



Number of Prescriptions per Member - The age and sex of the population along with 
various adjusters for the general health of the population will impact the number of 
prescriptions dispensed on an annual basis. The statistics in Table 17 represent a mix of 
active personnel, pre-65 retirees and post-65 retirees. It is probable that a post-65 
population will have a higher use rate. 

Specific statistics on post-65 retirees were either not available or considered proprietary 
by the clients with whom PwC held discussions. 



130 



S2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Generic Use Rate - The benefit plan design will have the most impact on the use of 
generic pharmaceuticals. Benefit plan features that impact generic use include: 

• The variance in the co-pay or coinsurance between generic and branded drugs; 

• The use of a mandatory generic policy, either in all cases or in cases where a 
physician does not specifically write " Dispense as Written" (DAW) on the 
prescription; 

• The provision of incentives (usually through higher dispensing fees) to pharmacists to 
dispensing generic pharmaceuticals with the approval of the patient and/or the 
patient's physician; and 

• The use of various patient and physician educational programs on the availability and 
cost benefit of generic pharmaceuticals. 

Average Ingredient Cost per Prescription - Both the demographics of the population and 
the benefit plan design will impact the average ingredient cost per prescription. A more 
senior population will probably have a higher use rate of more costly medications (i.e. 
cardiac and arthritis pharmaceuticals). A benefit plan design that does not include the 
proper incentives (level of copays and coinsurance) for the use of generics and preferred 
branded (three-tier benefit plan design) pharmaceuticals will probably have higher 
utilization of more costly brand name pharmaceuticals and thereby, a higher average 
ingredient cost. 

Average Annual Cost per Member - The same factors that impacted the average 
ingredient cost per prescription along with the overall health of the population will 
impact the average annual cost per member. 

In addition, clients will also monitor their average dispensing fees (if variable dispensing 
fees are used) and the amount of rebates received from the pharmaceutical manufacturers 
through their PBM. Rebates may be measured as an amount per all prescriptions, an 
amount per brand prescriptions, an amount per formulary prescription or other methods 
agreed upon between the client and the PBM. Table 10 in Section 3.1.1 provides an 
average range of dispensing fees while average rebate guarantees are described below. 

Dispensing Fees - Dispensing fees will be impacted by the methodology agreed upon 
between the client and the PBM. Some clients prefer a set dispensing fee while other use 
their dispensing fee to incent pharmacists to dispense generic pharmaceuticals. 



131 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Manufacturer Rebates - The rebate payment schedule is often monitored, with rebates 
paid to the cHent on a quarterly basis and within six months of the quarter in which rebate 
was earned. 

The level of rebate payments is usually expressed as a dollar amount per prescription. 
Industry average rebate guarantees are approximately SO. 85 — SI .25 per prescription. 

Attention must be paid to the basis of the rebate guarantee. Some PBMs offer rebate 
guarantees on all prescriptions, some propose a guarantee based on all retail 
prescriptions, some propose rebates based on all brand prescriptions, some provide 
rebates for only formulary prescriptions, and some vary the level of rebate between retail 
and mail order. The PBMs offer the guarantees to their clients even though the actual 
rebates are paid by the manufacturers and "passed through" the PBM to the client. 

The level of rebates will depend on the structure of the plan design including the level of 
copays/coinsurance, the number of tiers, the structure of the formulary, and negotiations 
between the client and the PBM. Most large clients receive 100% of the manufacturer 
rebates due them while smaller clients may only receive a percentage of the rebates. 
Rebates range from 2% to 5% of total pharmacy benefit plan costs based on the factors 
listed above. 

4.2 PBM Service Performance Indicators and Benchmarks 

4.2.1 Administrative Performance Benchmarks and Guarantees 

Table 1 8 displays the administrative performance benchmarks and guarantees that are 
commonly used in contracts between clients and PBMs. 



Table 18: Administrative Service Performance Benchmarks 



Performance Criteria/Guarantee Level 


Expected Outcomes 


System availability - system available for access 
to contracted pharmacies 

Availability of the PBM's systems to electronically 
adjudicate claims from retail pharmacies. 


99% system availability is the minimum acceptable 
outcome with a penalty assessed for failing to meet 
this minimum standard. 


Paper claim turnaround time 

Time required to process a paper claim after 
receipt. 


99% of all paper claims processed within 10 days is 
the minimum acceptable level with a penalty 
assessed for each percentage below the 99% level. 



132 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Table 18: Administrative Service Performance Benchmarks (continued) 



Performance Criteria/Guarantee Level 


Expected Outcomes 


Claim accuracy 

Payment of the claim in accordance with 
the benefit plan parameters and financial 
accuracy. 


Online claims - 100% 

Paper claims - 99% 

The above levels are the minimum 
acceptable levels for claims accuracy with 
penalties assessed for achieving less than 
the minimum level. 


Phone answer time 

The time it takes for the PBM to answer a 
customer service call. Connection to a 
PBM's decision tree or other electronic 
phone answering mechanism is considered 
answering the phone. 


95% of all calls are expected to be 
answered within 30 seconds. 

Measured through the review of PBM 
supplied reports, there is a penalty assessed 
for failing to meet the minimum 95%o level. 


Phone call abandonment 

The rate at which calls are abandoned due 
to excessive answering time or other 
telephone problems. 


3% is the minimum acceptable level with a 
penalty assessed for failing to meet the 
minimum. Usually judged based on PBM 
supplied reports. 


Mail order turnaround time 

Time it takes the PBM's mail pharmacy to 
dispense/distribute product after receipt of 
the prescription. It does not include 
delivery time. 


95%) are expected to be processed in two 
days for cases not requiring intervention. 

95%) are expected to be processed in five 

KXayo l\jV CdoCb iCUUlilllg lillCI VCllllUil. 

Interventions include attempts at generic or 
therapeutic switches, reviews for drug 
interactions, and the gathering of additional 
information required to dispense the 
pharmaceutical. 

The levels listed above are the minimum 
acceptable levels with penalties assessed 
for failing to meet the minimum. 



133 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Table 18: Administrative Service Performance Benchmarks (continued) 



Performance Criteria/Guarantee Level 


Expected Outcomes 


Program satisfaction 


At least 85% of respondents are expected to 
service as excellent or good with penalties 
assessed for failing to meet these levels. 


ID card delivery 


Minimum acceptable level requires ID 
cards to be mailed within 5 days of receipt 
of eligibility update with penalties assessed 
for failing to meet these levels. 


Accurate and timely update of eligibility 
files 


Minimum acceptable level requires 
eligibility files to be 100% accurate and 
updated within 5 days of receipt with 
penalties assessed for failing to meet these 
levels. 


Preparation of clinical or financial 
reports 


Minimum acceptable level requires reports 
to be delivered within 21 days of request. 
Some contracts contain alternative report 
delivery dates (e.g., 15 days after the end of 
a quarter) based on the needs of the client 
with penalties assessed for failing to meet 
these levels. 


Delivery of routine 
financial/management reports 


Minimum acceptable level requires 
delivery within 30 days of the period to 
which they apply (slight variation in the 
number of days contained in contracts) 
with penalties assessed for failing to meet 
these levels. 



134 



£2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

4.2.2 Pricing Benchmarks and Guarantees 

Discount Guarantees 

Discount guarantees ensure that the cHent's contracted discount off AWP (e.g., ingredient 
cost) is achieved. The measurement of the realized discount includes the AWP discount, 
Usual and Customary, and MAC pricing reimbursed to network pharmacies. 

Certain components of this discount are fixed in advance. For example, the PBM and the 
client generally fix the retail and mail discounts, for brand and generic drugs, as a 
percentage discount off AWP. 

The discounts offered on retail pharmacy networks are consistent across the larger PBMs. 
There is some variance in the discounts guaranteed for mail order. In general, PBMs 
have consistently met or exceeded their discount guarantees. 

PBMs will not usually provide specific discount quotes outside of a formal bid process. 
This will be an area for HCFA to explore during its process to evaluate and select a PBM. 

DUR Cost Savings 

DUR guarantees are rare. This is a result of the difficulty in quantifying the guarantee and 
resultant savings, and a perceived lack of accuracy and credibility in the measurement of 
results. A number of factors can effect the measure of DUR cost savings including 
manufacturer price changes, changes in treatment protocol and usage guidelines, and new 
medications. 

If a DUR guarantee is included in a client's contract, it is a common practice to guarantee 
savings on yearly basis, with greater savings in year one. PBMs measure program 
savings and guarantees, on a dollar for dollar basis with savings guarantees of 4-5 percent 
of net plan cost in Year One, 3-4 percent of net plan cost in Year Two, and 2-3 percent of 
net plan cost in Year Three. For each full percentage point below the guaranteed target, 
the PBM makes up 100 percent of the shortfall on a dollar for dollar basis usually up to 
an agreed upon cap. 

In many cases, the cost of the DUR programs is included in the overall administrative 
fee. Some PBMs charge separately for DUR pharmacy management (approximately $1 
per employee per month) and guarantee that plan savings will at least equal the DUR 
administrative fee. Any savings over and above the DUR administrative fee are shared 
equally between the client and the PBM. 



135 



92001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Shared Savings Guarantees 

Shared savings guarantees are a type of risk sharing agreement between the PBM and the 
client. As with DUR cost savings guarantees, these arrangements are rare in chent 
contracts due to the difficulty in monitoring/auditing the actual results. Historically, 
PBMs did not have much success in predicting overall costs under risk-sharing 
arrangements. This was due to their inability to predict the factors affecting prescription 
drug costs, and their overly optimistic estimates of savings from utilization management 
programs. As a result, PBMs experienced significant underwriting losses, and have 
become much more conservative and hesitant to engage in significant risk sharing 
programs. 

The reluctance to enter into risk sharing programs continues today. The increasing 
inflationary trend along with the rapid emergence of new pharmaceuticals is causing 
PBMs to refuse to enter into new risk sharing arrangements and to phase out existing 
programs. In general, PBMs will not even consider this type of arrangement without at 
least two years of detailed cost and utilization data for the proposed covered population. 
In addition to data, PBMs will require significant input into the proposed benefit plan 
design parameters and control over areas such as generic substitution, therapeutic 
substitution and other clinical programs within the pharmacy benefit. 

PwC found only one occurrence of a shared savings agreement during our discussions 
with PBMs and clients. The details of the agreement are considered proprietary, but 
included the availability of significant amounts of data and significant control by the 
PBM over the benefit plan design and the clinical programs. 

4.2.3 Access and Network Performance Benchmarks and Guarantees 

As discussed throughout Section 3.4 of this report, pharmacy access is an important 
criterion in selecting and monitoring a PBM vendor. Today, with geo-access mapping 
software, it is relatively easy to determine a member's access, measured by distance, to 
the nearest network pharmacy. After implementation is complete, access guarantees are 
established to monitor the overall percent of members within a set distance from a 
pharmacy. 



136 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Clients use access rates such as one pharmacy within 1, 3, or 5 miles of a member's 
home. Instead of a uniform measurement for all members, some clients vary the access 
rate by urban, suburban, or rural as portrayed in the example below: 

• Urban - one pharmacy within 1 to 2 miles of a member's home 

• Suburban - one pharmacy within 3 to 5 miles of a member's home 

• Rural - one pharmacy within 6 to 10 miles of a member's home 

Access standards may also vary based on the size of the retail network and whether the 
member population is urban or rural. Typical standards require that at least 90-95% of 
the covered population have access to a retail network pharmacy within the specified 
mileage requirement. Additional guarantees may be put in place to ensure that specific 
retail chains remain in the network. 

Even with the increasing use of mail order, access to a local pharmacy is still an 
important consideration. Many individuals still have an "attachment" to their local 
pharmacy and will strongly desire access to their pharmacy. Some clients are now 
starting to perform a disruption analysis that concentrates on the pharmacies the covered 
population utilizes more than on the distance test. 

In general, the larger PBMs have extensive networks that meet or exceed the 
requirements listed above. 

4.2.4 Mail Order Dispensing and Retail Pharmacy Benchmarks and Guarantees 

Given the potential ramifications of errors committed in the dispensing of drugs, very 
high standards are set for a PBM's mail order facility in the dispensing of 
pharmaceuticals. A common standard for mail order dispensing is 99.99% of all 
prescriptions filled accurately. Self reported statistics indicate that the PBMs contacted by 
PwC are meeting this standard, 

PBMs are also obligated in the majority of cases to perform audits of their network 
pharmacies. A common standard is that 4% of pharmacies within a PBM's network are 
audited on an annual basis. PBMs will usually return 100% of recovered claims due to 
errors by the pharmacy to the client. Errors include the failure to price the drug at the 
lessor of the discount rate or the usual and customary (U&C) rate, the application of the 
wrong AWP, etc. However, in the case of on-site audits, PBMs may retain a small 
percentage (10-20%) of recovered claims to cover their costs. 



137 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



Because new pharmaceuticals are constantly being introduced, PBMs are obligated to 
inform clients of new drugs and the potential implications to their plan at least quarterly, 
with individual updates at least 30 days prior to the release of expensive new drugs. 

4.2.5 Levels of Guarantees and Incentive Payments 

Penalties for not achieving established guarantees are usually capped at between 20-50% 
of total administrative fees. Some large clients have negotiated guarantees that place 
100% of a PBM's administrative fees at risk; one large client has no cap on the PBM's 
liability for failing to meet certain cost guarantees. Each guarantee is assigned a specific 
guarantee amount (e.g. 2% of administrative fees for claims turnaround or a set dollar 
amount) with the total not exceeding the cap. 

Some clients also provide incentives for exceeding certain guarantee amounts. The most 
common incentives are for exceeding the generic substitution rate, member satisfaction, 
and financial accuracy. For example, a client and a PBM may agree that for each 
percentage point the PBM raises the generic substitution rate, the client and the PBM will 
each split the estimated savings. The split may be an even 50% - 50% split or with larger 
clients, the split would more likely be a 70% client, 30% PBM split. Fixed dollar 
bonuses or bonuses based on a percentage of base administrative fees are more common 
incentives for member satisfaction and financial accuracy. 

4.2.6 PBM Performance in Relation to Guarantees and Benchmarks 

During discussions with clients, they were asked whether a series of performance 
standards and guarantees are included in their contracts with PBMs. In addition, the 
clients were asked whether the standards set forth were being met. Table 1 9 on the 
following page displays the various standards and the prevalence of their inclusion in 
contracts. The percentage listed under the "Included in Contract" column indicates the 
percentage of clients contacted by PwC that had the specific guarantee in their current 
PBM contracts. 

In addition, clients were asked to report on the recent performance of their PBM with 
respect to meeting these standards. In areas where performance was measured, these 
standards, without exception, were currently being met by the PBM. Most clients that had 
recently switched to a new PBM did so due to price considerations. However, two of the 
seven clients participating in this study, sited dissatisfaction with service or network 
access provided by their prior PBM. 



138 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Table 19: Typical Performance Guarantees and Performance of PBMs 



Standard/Guarantee 


Included 
in 

Contract 


Recent 
Performance 


System availability - system available tor access to contracted 
pharmacies 99% of the scheduled time (measured on an annual basis). 


80% 


Met 


Paper claim turnaround time - 99% of all claims processed within 10 
days. 


60% 


Met 


Claim accuracy: online claims - 100% Paper claims - 99%. 


80% 


Met 


Phone answenng time - 95% within 30 seconds. 


100% 


Met 


Phone call abandonment - 3% or less. 


100% 


Met 


Mail order dispensing accuracy - 99.99%. 


80% 


Not reported 


Mail order turnaround time: 

^^{\ intprvpntion OS^/^ in tAvo njiVQ 

IWJ llllCl VdlliLrll /O 111 IVVU UdVo* 

Intervention - 95% in five days. 


60% 

\j\J / 


iVlCl 


Pharmarv audits — nprform audits of 4% of nharmarips anniiallv and 
return 100% of errors uncovered to employer. 


60% 


Not renorted 


Program satisfaction is expected to be by 85% of respondents as excellent 
or good in surveys conducted by the PBM. 


20% 


Not renorted 


ID card delivery — mailed within 5 days of receipt of eligibility update. 


60% 


Met 


Rebate payments — rebates paid to employer on a quarterly basis and 
within SIX months of quarter in which rebate was earned. 


80% 


Met 


Inform client of new drugs and potential implications to employer's plan 
- quarterly updates and individual updates at least 30 days prior to release 
of expensive new drugs. 


60% 


Met 


Preparation of ad-hoc clinical or financial reports - delivered within 21 
days of request. 


40% 


Met 


Discount guarantees - guarantee that the discount from AWP listed in 
proposal is actually achieved. 


80% 


Met 


DUR cost savings - document cost savings associated with DUR 
programs. 


20% 


Not reported 


Delivery of routine financial/management reports within 30 days of 
period to which they apply. 


40% 


Met 


Network access - number of pharmacies or distance/time to a pharmacy. 


60% 


Met 


Shared savings guarantees - documented achievement of proposed 
savings. 


20% 


Met 



139 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Guarantees in the areas of satisfaction surveys, ad-hoc reports, routine reports, DUR cost 
savings, and shared savings were included in less than 50% of the contracts of the clients 
contacted by PwC. Possible reasons for the lack of inclusion in client contracts are listed 
below: 

Satisfaction Surveys - Many clients prepare a comprehensive member satisfaction survey 
covering all facets of employee benefits or services including PBM services. They do not 
want to pay the additional expense for a PBM specific survey. 

Ad-hoc Reports and Routine Reports - Clients expressed the belief that due to the varying 
nature and difficulty of the reports requested, a standard delivery schedule would not be 
appropriate. 

DUR Cost Savings - Due to the rare nature of this type of guarantee and the difficulty in 
delineating the savings, only a few clients contacted by PwC had this type of guarantee. 

Shared Savings - These types of programs are rare and becoming more so. 

4.3 Performance Expectations and Administrative Requirements for a Senior 
Population 

Given that the senior population has different needs than the non-senior population, 
performance guarantees should reflect the requirements needed to effectively service this 
population. During discussions with clients, the question of how guarantees or standards 
should be altered to best service the Medicare population was raised, and several 
suggestions were made. 

First, the general perception is that the customer service function will be more important 
for seniors, and that performance requirements for areas such as telephone service and 
communication be strengthened. The suggestion was also made that requirements be 
established mandating the training of customer service reps on issues and sensitivity 
concerning the elderly. 

Second, because seniors are significantly higher users of maintenance drugs, they should 
be encouraged to use mail order services. Standards should be established to steer 
beneficiaries to mail order services. Similarly, significant savings can be gained by 
substituting generics for branded drugs. Standards should be established with respect to 
the percent of prescriptions dispensed as generics. 



140 



©2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

4.4 Overall PBM Performance Assessment 

One of the best means of tracking overall PBM performance is by conducting annual 
customer satisfaction surveys. The Pharmacy Benefit Management Institute, Inc. (PBMI) 
conducts such a survey, and their The 2000 Pharmacy Benefit Manager Customer 
Satisfaction Survey Report presents data on current satisfaction levels, as well as trends 
over time. Significant findings of this survey are reported throughout this section. 

Overall Satisfaction Over Time 

Current satisfaction with overall service and performance of PBMs is relatively high, and 
these ratings have increased over time. It should be pointed out that while the majority of 
respondents are very satisfied, approximately 40% of respondents gave their PBM a 
rating of 7 or less on a scale of 1-10. 



Table 20: Overall Client Satisfaction with PBM Performance 





1995 


1998 


2000 


Satisfaction Level 


% Rating 


% Rating 


% Rating 


High (8-10) 


49 


60 


61 


Medium (5-7) 


40 


32 


33 


Low(l^) 


11 


9 


6 


Average rating 


7.1 


7.4 


7.5 



Satisfaction versus Implementation Year 

When satisfaction is evaluated according to the employer's start date with a PBM, 
employers who implemented a new PBM during the current year are least satisfied. The 
average rating of 7.3 for those starting with a PBM in 2000 is well under the rating score 
of 7.7 for employers whose plans have been in place since 1997.^^ This implies that the 
implementation process can be difficult. 

Satisfaction with Individual Functions — Current Satisfaction Levels 

Respondents to the PBMI survey were asked to rate their satisfaction with the quality of 
service for 18 specific functions and performance indicators. There is a relatively wide 
gap (2.5 rating points) between the average rating for the highest-rated function 



The 2000 Pharmacy Benefit Manager Customer Satisfaction Survey Report (Pharmacy Benefit Management 
Institute, Inc., October 2000): 4. 
Ibid., 4 



141 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

(pharmacy network quality and size) and the lowest-rated function (disease management 
programs). Table 21 displays the five highest and lowest rated functions. 



Table 21: Client Satisfaction with Specific PBM Functions 



Highest Rated Functions 


Average Rating* 


Pharmacy network quality and size 


8.8 


Claim processing 


7.7 


ID card production & distribution 


7.6 


Eligibility data management 


7.4 


Value for administrative costs 


7.4 


Lowest Rated Functions 


Average Rating* 


Disease management programs 


6.3 


Utilization & benefit management consulting 


6.4 


Proactive account management 


6.6 


Dollar amount of manufacturer rebates 


6.7 


Plan implementation/changes 


6.8 



♦Scale = 1-10 



Satisfaction Level Trends 

The PBMI survey compared the 2000 satisfaction ratings with 1999 ratings for specific 
functions and performance indicators. Table 22 documents the greatest changes in 
average rating, and indicates that the average rating for mail service pharmacy 

78 

experienced the greatest decrease in customer satisfaction. 



Table 22: Comparative Performance 1999 versus 2000 



Function 


Change in Average Rating* 


Mail order vendor quality and performance 


-0.35 


Delivering promised services 


-0.18 


Claim processing 


-0.10 


Delivering promised savings 


0.11 


Utilization & benefit management consulting 


0.12 


Disease management 


0.13 


Formulary management 


0.14 



*Scale represents difference for two years on 1-10 rating displayed in Table 19 



Ibid.,5 
Ibid.,8 



142 



S2001. PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

5.0 CONCLUDING COMMENTS 

PBMs have emerged as the national standard in the administration of pharmacy benefits 
in the United States. Today, in an environment of rising drug costs and utiHzation, PBMs 
manage the drug benefits of approximately 70% of the United States, including 65% of 
the country's seniors. The PBM's ability to reduce costs, provide national pharmacy 
access, and administer benefits that are customized to meet the needs of a wide range of 
clients in a highly automated environment attribute to the success of the PBM industry 

In our discussions with the leading PBMs there was consensus that extending a drug 
benefit to the senior population would not have a significant impact on the industry. For 
the most part, PBM operations are highly automated and relatively insensitive to volume 
with the leading PBMs all demonstrating an ability to rapidly scale up their operations for 
new, large clients. 

The Medicare population does however, present Congress, HCFA and the PBM industry 
with a set of unique challenges and opportunities. Characteristically, seniors place 
higher demands on PBMs than non-seniors, and have different, more complex needs. In 
our discussions with the leading PBMs, we found agreement on the following: 

■ A Medicare benefit will take longer to implement than a non-Medicare benefit. This 
is partly due to the effort and time expected to educate seniors on their benefit; 

■ Seniors take more medications than non-seniors, and use more chronic medications; 

■ Seniors have higher service costs than non-seniors. This is partly due to longer "talk 
times" into the call centers, and the need for specially trained, dedicated customer 
service reps; 

■ Seniors have different clinical needs than non-seniors. For example, drug dosing 
regimes and the prevalence of certain disease states change as people age. 

As the possibility of extending a Medicare drug benefit moves through legislation, 
Congress and HCFA will need to decide how to obtain discounted pricing, the benefits 
and services it will offer, and whether it will use the PBM's formulary and clinical 
services or design its own. Ultimately, Congress will need to decide the role of HCFA 
and that of the PBM. 

Several strategies are available to obtain discounted pricing for the Medicare population. 
These strategies include contracting with a PBM on a fee-for-service, risk sharing 
arrangement, or legislation on special pricing. Congress (or HCFA) may have the option. 



143 



©2001 , PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

to pursue legislation on special pricing for Medicare similar to that used by Medicaid to 
fix rebate amounts. 

Among the key decisions that will need to be made is what benefits and services will be 
included in a Medicare drug benefit. This includes deciding the drugs that are covered, 
member cost sharing requirements and benefit limits (if any), size of the pharmacy 
network, and whether a mail service will be provided. 

Opportunities to manage Medicare drug costs should also be considered. Beyond 
restricting pharmacy networks, limiting drug coverage and mandating generics, the 
benefit can be designed to incent behavior that reduces cost. For example, tiered co-pays 
can be structured that favor preferred medications or use of a mail pharmacy where 
deeper pricing discounts are available. Wellness and disease management programs, and 
senior specific utilization edits can also be used to control costs, improve patient care, 
, and help prevent over prescribing. 

A decision will also need to be made as to whether a Medicare formulary will be 
established, in lieu of using the PBM's formulary. Better rebates and admin fees could 
result from the creation of a Medicare formulary. Negotiating with manufacturers for 
position on such a formulary would likely leverage the senior population most 
effectively, and provide the most favorable contracts. This would also help to ensure the 
clinical needs of this population were met. 

As it decides on the role of the PBM, HCFA (and Congress) has the opportunity to retain 
control over the value added, differentiating aspects of a Medicare benefit. These include 
formulary management and clinical control, member services, and manufacturer 
contracting. Medicaid and some larger insurers and managed care organizations do this. 
This would allow HCFA to control member services, and to ensure the value of the senior 
population was maximized by capitalizing on the high utilization and possible restrictive 
plan design of this population, thereby maximizing price discounts and rebates. In this 
scenario, a PBM would be contracted for administrative services such as claims 
processing and network administration. 

The opportunity also exists to take advantage of emerging programs designed to reduce 
administrative costs. For example, the leading PBMs are using the Internet to provide a 
variety of member services such as benefit information and help locating network 
pharmacies. In addition, IVR (intelligent voice recognition) technology is being used to 
check prescription status in mail pharmacies, refill prescriptions, request forms, and meet 
other member needs. 



144 



S200I, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Moving forward, HCFA should plan on a PBM selection process that will take 9-12 
months. This includes establishing a selection team and clearly defining HCFA's goals 
and objectives. Once these steps are completed, the team will need to develop and issue 
an RFI, followed by an RFP. Proposal analysis, vendor presentations, site visits and 
reference verifications will follow, culminating in selection of the PBM. 

In the last 10 years the PBM industry has grown and repositioned itself: it is now 
developing ambitious new programs to help clients better manage drug spending and 
administer benefits. Although the industry faces its challenges, the leading PBMs are 
generally seeing improved margins; the industry overall is expected to continue to 
provide valuable services to its clients. All leading PBMs such as AdvancePCS, 
Caremark Rx, Inc., Express Scripts Inc., and Merck-Medco Managed Care, L.L.C., 
insurer owned PBMs like Wellpoint, and retail chain owned PBMs like New Eckerd 
Health Services, as well as others, are viable candidates to help HCFA administer a 
Medicare drug benefit. 



145 



©2001 , PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 
APPENDIX A: LIST OF EXHIBITS 

Table 1: Leading PBMs Pg. 7 

Diagram 1 : Selection and Implementation Timeline Pg. 1 1 

Diagram 2: The PBM Value Chain Pg. 16 

Diagram 3: PBM Client Profile, 1998 Pg. 17 

Table 3: Key Manufacturer PBM Acquisitions and Alliances (1993-1994) Pg. 23 

Diagram 4: Payment Source of Retail Drug Purchases 

(at point of sale), 1 992-1 998 Pg. 25 

Diagram 5: Drug Expenditures as a Percent of National 

Health Expenditures Pg. 27 

Diagram 6: Real Spending for Prescription Drugs, 1995-1998 Pg. 28 

Diagram 7: Projected U.S. Per Capita Drug Expenditures Pg. 28 

Diagram 8: Total Prescriptions Dispensed, 1992-1999 

and Estimated 2000 and 2004 Pg. 29 

Diagram 9: Drug Expenditures by age Group and Income, 1997-1998 Pg. 30 

Diagram 10: Impact of New Drugs Introduced Since 1992 

on Drug Utilization and Cost Pg. 3 1 

Diagraml 1: Drug Coverage of Medicare Beneficiaries, 1998 Pg. 32 

Diagraml2: Drug Coverage of Medicare Beneficiaries, 2000 Pg. 33 

Diagram 13: Annual Drug Utilization for Medicare and 

Non-Medicare Individuals, 1996 Pg. 34 

Table 3: PBM Market Segments Pg. 35 

Table 4: Profile of Top Four PBMs Pg. 36 



146 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Diagram 14: Value of Drug Patent Expirations (by year), 1998-2004 Pg. 39 

Table 5: Key Regulations Impacting and Governing the PBM Industry Pg. 41 

Table 6: PBM Services Pg. 5 1 

Diagram 15: PBM Revenue and Money Flow Pg. 60 

Table 7: FFS versus PBM Cost Savings Pg. 61 

Table 8: PBM Services Pg. 66 

Table 9: A Leading PBM's Pharmacy Network Pricing Pg. 71 

Table 10: Retail and Mail Discounts and Dispensing Fees Pg. 74 

Diagram 16: Mail Pharmacy Process Flow Pg. 75 

Diagram 17: Reimbursement of Ingredient Costs — Branded Drugs Pg. 88 

Diagram 18: Reimbursement of Ingredient Costs — Generic Drugs Pg. 89 

Diagram 19: Manufacturer Rebates - Branded Products Pg. 90 

Table 1 1 : Contract Terms and Conditions Pg. 96 

Table 12: PBM Duties Pg. 97 

Table 13: Client Duties Pg. 98 

Table 14: Pharmaceutical Pricing and Administrative Fees Pg. 99 

Table 15: Compliance and Security Issues Pg. 100 

Diagram 20: Sample Bidding and Selection Timeline Pg. 103 

Table 16: Relative Importance of RFP Sections Pg. 110 

Diagram 21: Typical 90-Day Implementation Schedule — January 1 Start-up Pg. 1 16 



147 



©2001 , PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 


Diagram 22: Sample Medicare Twelve Month Bidding/Selection Timeline 


Pg- 


125 


Diagram 23: Sample Medicare Twelve Month Implementation Schedule 


Pg- 


126 


Table 17: Range of Results for Common Cost and Utilization Measurements 


Pg- 


130 


Table 18: Administrative Service Performance Benchmarks Pg. 


132- 


134 


Table 19: Prevalence of Performance Guarantees and The PBMs Performance 


Pg- 


139 


Table 20: Overall Client Satisfaction with PBM Performance 


Pg- 


141 


Table 21: Client Satisfaction with Specific PBM Functions 


Pg- 


142 


Table 22: Comparative Performance 1999 vs 2000 


Pg- 


142 



148 



52001, PncewalerhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

APPENDIX B: GLOSSARY OF TERMS 

Administrative Fees - Per claim fees paid by clients to PBMs for services like claims 
processing. Also used to denote the fees paid by manufacturers to PBMs for 
administering formulary rebate contracts. 

Average Wholesale Price (AWP) - A published suggested wholesale price for a drug, 
based on the average cost of the drug to the pharmacy. AWP is often used by pharmacies 
to price prescription drugs. 

Benefit Administration - The administration of drug benefit designs. It includes setting 
up and maintaining the drug coverage and exclusions, setting limits on drug coverages, 
and defining member cost sharing requirements. 

Capitated Contract - A very rare contract among PBMs. It is used when a PBM agrees 
to assume financial risk for a client's drug spending. Capitation is a set dollar amount, 
established by analysis of pharmacy claims data, used to cover the prescription costs for a 
member, usually set at a per member per month rate (PMPM). 

Claims Adjudication - The online processing of a prescription drug claim. Most claims 
are submitted electronically at the point of service (the retail or mail pharmacy). 

Client - A MCO, employer, or insurer that contracts with a PBM to administer their drug 
benefits and cost control programs. 

Co-pay - A fixed dollar amount paid for every prescription. 

Co-insurance - The fixed percentage members pay of the cost of each prescription. 

Deductible - A specific annual dollar amount that a member must pay out-of-pocket for 
prescription drugs before the drug benefit program begins. 

Disease Management Programs - Programs developed by PBMs to identify and 
categorize patients (especially those with chronic conditions) and to direct these patients 
towards a specific treatment protocol. 

Fee-for-Services Contract - The most common pricing arrangement PBMs have with 
their clients. Under the contract, PBMs are paid for the administrative services they 
provide, and they do not assume the risk for the cost of the drugs dispensed. 



149 



•92001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

Formulary - An approved list of branded (and generic) drugs developed by the PBM, or 
the client. 

• Open Formulary - A list of recommended drugs. Under this structure all 
drugs are reimbursed irrespective of formulary status. However, a client's plan 
design may exclude certain drugs (OTC, cosmetic, and lifestyle drugs). 

• Incented Formulary - An incented formulary applies differential co-pays or 
other financial incentives to influence patients to use, pharmacists to dispense, 
and physicians to write formulary products. 

• Closed Formulary - A closed formulary limits reimbursement to those drugs 
listed on the formulary. Non-formulary drugs are reimbursed if the drugs are 
determined to be medically necessary, and the member has received prior 
authorization. 

Health Care Financing Administration (HCFA) - the federal agency that administers 
Medicare , Medicaid , and the State Children's Health Insurance Program (SCHIP). 

Ingredient Cost - The cost to the pharmacy for dispensed drugs (AWP - discount %) 

Mail Pharmacy - Mail pharmacies dispense a 90-day supply of drugs through the mail; 
typically used for chronic conditions. Most pharmacy benefit plans offer a mail pharmacy 
service as a way to promote cost savings and improve access. 

Managed Care Organization (MCOs) - A broad term encompassing a variety of 
healthcare delivery systems utilizing group practice and providing an alternative to fee- 
for-service health plans. The primary goal of a MCQ is to create incentives to use a 
prepaid and organized healthcare system that serves a defined population. 

Manufacturer - A company that manufacturers branded and/or generic pharmaceuticals. 

Maximum Allowable Cost (MAC) - The price basis for generic drugs which is typically 
50-60% below AWP. PBMs can either set the MAC prices themselves, or use the MAC 
prices set by HCFA for Medicaid beneficiaries. 

Member - A covered individual within a health plan. 

PEPM - Per employee per month 



150 



£2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

PMPM - Per member per month; in an employer plan includes employees and their 
covered dependents. 

Pharmacy Benefit Manager/Management (PBM) - A company providing 
administrative and clinical services through a complex system that includes retail 
pharmacies, manufacturers, clients, physicians, and members. These companies 
administer drug benefits and drug cost control programs for their clients, and secure 
substantial discounts from retail pharmacies and drug manufacturers. PBMs establish and 
maintain large pharmacy networks with chain and independent pharmacies. Also, PBMs 
contract with manufacturers of branded products to receive rebates and administrative 
fees. 

Pharmacy Network - Specifies which pharmacies are approved for members, and 
includes retail, mail, and in some cases specialty pharmacies. 

Prior Authorization - A prior approval process that allows prescription drugs to be 
dispensed to members only when specific conditions have been met. 

Shared Savings Contract - A contract between a PBM and a client that provides 
incentives for both sides to collaborate and run the pharmacy benefit effectively and to 
share in the overall cost savings. 

Therapeutic Substitution Programs - Typically operated in mail pharmacies to 
encourage physicians and patients to switch from the drug prescribed to lower cost, 
comparable drugs. Substitution requires physician and typically member permission. 

Rebates - Paid by manufacturers to PBMs for the sale of branded drugs to PBM 
members. 

Usual and Customary (U&C)- The price pharmacies charge to cash paying customers 
for prescription drugs. 

Utilization Management Programs - Programs designed to lower drug costs and 
utilization and to encourage the use of generics or preferred products. These programs 
include services such as prior authorization, drug utilization review (concurrent and 
retrospective), academic detailing programs, and patient education. 



151 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



APPENDIX C: REFERENCES 

Alberton, David. "Express Scripts - ValueRx Deal a Strong Declaration of 
Independents.'" Employee Benefit News. April 1, 1998. 

"Audit Data Outline Target for Pharmacy Cost Control." Employee Benefit News. April 
15, 1999. 

Banahan, Benjamin, and Suyz Buckovich. "Patient Privacy, Confidentiality and 
Security." Drug Topics. 144, no. 4 February 21, 2000. 72. 

Caremark. "10-K Report to the Securities and Exchange Commission." March 1999. 

Clemmitt, Marcia. "Will We Try to Manage Care Again? This Time, for Drugs?" 
Medicine and Health. 54., no. 25 June 19, 2000. 1. 

"Concepts in Managed Care Pharmacy Series: Formulary Management." The Academy of 
Managed Care Pharmacy. April 30, 1998. www.amcp.org - link to Concepts in Managed 
Care Pharmacy. 

Cook, Anna, "Pricing Mechanism Used by the Federal Government to Contain 
Prescription Drug Costs. August 2000. Prepared for U.S. Department of Health and 
Human Services' Conference on Pharamaceutical Pricing Practices, Utilization and 
Costs. 

Coopers & Lybrand. Appendix B, Summary of Employer Rebate Experience, 1993 — 
1995. Chicago: Coopers & Lybrand. 1996. 

Cox, Emily, and Cindy Jemigan. "Prescription Drug Options for Medicare 
Beneficiaries." Jowrna/ of Managed Care Pharmacists 5., no. 3 (May/June 1999): 250- 
254. 

Davis, Margaret, et al. "Prescription Drug Coverage, Utilization and Spending Among 
Medicare Beneficianes." Health Affairs 18., no. 1 (January/February 1999). 231-243. 

Decision Resources. "PBMs in the Managed Care Marketplace: An HMO Perspective." 
Spectrum Pharmaceutical Industry Dynamics (October 28, 1994). 

Dow Jones Interactive. Various dates. 



152 



52001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



DiMasi, Joseph, Ph.D. "Price Trends for Prescription: Pharmaceuticals: 1995-1999" 
(August 2000). Prepared for U.S. Department of Health and Human Services' Conference 
on Pharamaceutical Pricing Practices, Utilization and Costs. 

Dubois, Robert, et al. " Explaining Drug Spending Trends: Does Perception Match 
Reality." Health Affairs 19., no. 2 (March 1, 2000). 231-239. 

Ehteredge, Lynn. "Purchasing Medicare Prescription Drug Benefits: A New Proposal." 
Health Affairs, 18., no. 4 (July 1, 1999) 7. 

Express Scripts. 1999 Drug Trend Report. Maryland Heights: Express Scripts, Inc. 
June 2000. 

Express Scripts, Inc. "10-K Report to the Securities and Exchange Commission." 
Maryland Heights: Express Scripts, Inc 1999. 

"Express Scripts Will Lose UHC Contract One Year DPS Acquisition." Pink Sheet. 
February 15, 1999. 

Financial Times/Coopers & Lybrand. "Adapting an Innovative Product/Service Strategy 
to a Geographically Varied Market Positioning." Paper presented at the World 
Pharmaceutical Conference, March 1995. 

Financial Times/ Coopers & Lybrand. "Healthcare Data — Getting the New Currency that 
Drives Strategy and Success." Paper presented at the World Pharmaceutical Conference, 
March 1995. 

Fish, Leslie, and Barbara Edelman-Lewis. "The Impact of a Therapeutic Interchange 
Program in a Managed Care Organization. Journal of Managed Care Pharmacy 5, no. 5 
(1999): 438-441. 

Foot, Sandra, and Lynn Etheredge. "Increasing Use of New Prescription Drugs: A Case 
Study." Health Affairs 9 no. 4 (July 2000): 165-170. 

Fox, Peter. Prescription Drug Benefits: Cost Management Issues for Medicare. 
Washington D.C.: Public Policy Institute, August 2000. 

"Get the Most Out of Your PBM." 12, no.W, Business & Health. November 1994, 37. 
IMS Health Retail Method-of-Payment Report™. 1999. www.imshealth.com. 



153 



S2001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

"Industry Consolidation." PBM News, 5, no. 3 (Fall 2000): www.pbmi.com. 

Krakoff, Hope. "The Internet and PBMs: New Business Model or Business as Usual?" 
Journal of Managed Care Pharmacy 6, no. 2 (March/April 2000): 102-107. 

Kreling, David. "Cost Control for Prescription Drug Program: Pharmacy Benefit 
Manager (PBM) Efforts Effects and Implications." Prepared for U.S. Department of 
Health and Human Services' Conference on Pharamaceutical Pricing Practices, 
Utilization and Costs. 

Kreling, David, et al. "Assessment of the Impact of the Pharmacy Benefit Manager," 
September 1996. This was a background paper prepared for the Department of Health 
and Human Services' Conference on Pharmaceutical Pricing Practices, Utilization and 
Costs. 

Latanich, Terry. "Issues in Managing Prescription Drug Benefits for Retirees — The PBM 
Perspective." November 20, 2000. Paper read at Issues in Managing Prescription Drug 
Benefits for Retirees Conference. 

"Managed Care Co-pays: Higher and Higher; More HMOs and Pharmacy Benefit 
Manager Using Three-Tier Cost Control Measures." Business Wire. August 7, 2000. 

Manieri, Elaine. "Vendor contracting for PBM Services: How to get more than you paid 
for?" Employee Benefit Plan Review 53 no. 28 April 1, 199922. 

"Medicare Fact Sheet." The Henry J. Kaiser Family Foundation, March 2000. 

Moskowitz, Daniel. "Federal and State Laws and Regulations Affecting Managed Care." 
Drug Benefit Trends 12, no. 8 (August 2000): 22-24. 

MuUin, Daniel, et al. "Projections of Drug Approvals, Patent Expirations and Generic 
Entry 2000 to 2004." August 2000. Prepared for U.S. Department of Health and Human 
Services' Conference on Pharmaceutical Pricing Practices, Utilization and Costs. 

Namovicz-Peat, Susan. HMO & PBM Strategies for Pharmacy Benefits. Washington 
D.C: Atlantic Information Services (AIS), 1999. 

National Association of Chain Drug Stores (NACDS) Economics Department. 

National Health Statistics Group, Office of the Actuary, HCFA: National Health 
Accounts. 



154 



©2001, PricewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



"PBMs Deliver Drug Cost Savings through Education, Substitution." Physician Manager 
10, no. 23 (December 3, 1999) 

Peard, Susan, et al. "Taking Stock of your PBM." Business and Health 18, no. 3 (March 
2000): 43-47. 

Pharmacy Benefit Managers: Early Results on Ventures with Drug Manufacturers. 
Washington, D.C.: United States General Accounting Office, November 1995. 

Poisal, John, et al. "Prescription Drug Coverage and Spending for Medicare 
Beneficiaries." Health Care Financing Review 20, no. 3 (Spring 1999): 15-27. 

Prescription Drug Trends in the U.S. 2000. PCS HealthSystems, 2000. 

Report to the President on Prescription Drug Coverage, Spending, Utilization and Price. 
Washington, D.C.: Office of Health Policy with the Office of the Assistant Secretary of 
Planning and Evaluation, April 2000. 

Scott, Miriam Basch, "Rx trends: Market shows strong growth rate; makers consolidate, 
PBMs emphasize managed care," Employee Benefit Plan Review, April 1, 1998. 

"State Rx Plans Enroll .2% and 18% of Medicare Beneficiaries, GAO Say." The Pink 
Sheet, 62, no. 30, September 18, 2000. 

The 2000 Pharmacy Benefit Manager Customer Satisfaction Survey Report. Pharmacy 
Benefit Management Institute, Inc., October 2000. 

"The Auditor Cometh." Drug Topics 141 no.20 September 20, 1997. 72. 

The Medicare Program^ Kaiser Commission on Medicaid and the Uninsured, 2000. 

"The Pharmaceutical Industry: A Discussion of Competitive and Antitrust issues in an 
Environment of Change." Federal Trade Commission, May 2000. 

"Value Health Seeking 'Significant Rate Increase' From Capitated Ford Contract; 
Decision Not to Sell PBM Due to Decreased Vertical Integration Interest." FDC Reports, 
December 5, 1994. 



155 



52001, PncewaierhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 

APPENDIX D: PBM Customer Satisfaction Survey Tool 

THE 2000 PHARMACY BENEFIT MANAGER CUSTOMER SATISFACTION 

SURVEY 

Please identify your current Pharmacy Benefit Management Company 
(PBM): 



When did you start using this PBM: 



The number of beneficiaries (employees, retirees, dependents) covered by this 
PBM? 



Do you contract with this PBM directly or through a medical plan administrator such as 
an HMO, TPA or insurance company (circle one): PBM / OTHER 



Rank each category by 




PBM Service Categories 


Rank each category by importance: 


importance: 
























LOW 




HIGH 




LOW 












HIGH 


1 2 


3 


4 


Overall service & performance 


1 


2 


3 


4 


5 


6 


7 8 


9 10 


1 2 


3 


4 


Value for administrative cost 


1 


2 


3 


4 


5 


6 


7 8 


9 10 


1 2 


3 


4 


Cost of the drug benefit 


1 


2 


3 


4 


5 


6 


7 8 


9 10 


1 2 


3 


4 


Proactive account management 


1 


2 


3 


4 


5 


6 


7 8 


. 9 10 


1 2 


3 


4 


Utilization & benefit management consulting 


1 


2 


3 


4 


5 


6 


7 8 


> 9 10 


1 2 


3 


4 


Plan implementation/changes 


1 


2 


3 


4 


5 


6 


7 8 


! 9 10 


1 2 


3 


4 


Pharmacy network quality and size 


1 


2 


3 


4 


5 


6 


7 8 


5 9 10 


1 2 


3 


4 


Eligibility data management 


1 


2 


3 


4 


5 


6 


7 J 


I 9 10 


1 2 


3 


4 


ID card production and distribution 


1 


2 


3 


4 


5 


6 


7 \ 


5 9 10 


1 2 


3 


4 


Customer and member services 


1 


2 


3 


4 


5 


6 


7 5 


I 9 10 


1 2 


3 


4 


Claim processing 


1 


2 


3 


4 


5 


6 


7 J 


? 9 10 


1 2 


3 


4 


Management reports 


1 


2 


3 


4 


5 


6 


7 J 


5 9 10 


1 2 


3 


4 


Drug utilization management 


1 


2 


3 


4 


5 


6 


7 J 


i 9 10 


1 2 


3 


4 


Disease management programs 


1 


2 


3 


4 


5 


6 


7 \ 


? 9 10 


1 2 


3 


4 


Formulary management 


1 


2 


3 


4 


5 


6 


7 


B 9 10 


1 2 


3 


4 


Dollar amount of manufacturer rebates 


1 


2 


3 


4 


5 


6 


7 


8 9 10 


1 2 


3 


4 


Delivering promised savings 


1 


2 


3 


4 


5 


6 


7 


8 9 10 


1 2 


3 


4 


Delivering promised services/capabilities 


1 


2 


3 


4 


5 


6 


7 


8 9 10 


1 2 


3 


4 


Mail order vendor quality and performance 


1 


2 


3 


4 


5 


6 


7 


8 9 10 



156 



132001, PncewaterhouseCoopers LLP 



HCFA Study of the Pharmaceutical Benefit Management Industry 



THE 2000 PHARMACY BENEFIT MANAGER CUSTOMER SATISFACTION 

SURVEY 

Are you (Circle one): Extremely Dissatisfied Somewhat Dissatisfied Netural 
Somewhat Satisfied Extremely Satisfied 

In what areas has your PBM shown the greatest improvement during the last year? 



In what areas has your PBM's performance declined most during the past year? 



Please provide additional comments about issues related to your satisfaction and PBM 
performance: 



157 



52001, PricewaterhouseCoopers LLP 



ens LIBRftRV 




flDTS D0DD5TLB E 



WorldCat 



Page 1 of 1 



WorldCat: Study of pharmaceutical benefit management 



OCLC 741108130 






HEC Holdings - no other holdings 






Books Rec Stat n 






Entered 20110713 


Replaced 20110713094341.2 






Type a 


ELvl 


I 


Srce d 


Audn Ctrl 


Lang 


eng 


BLvl m 


Form 


r 


Conf 


Biog MRec 


Ctry 


nyu 




Cont 


b 


GPub 


LitF Indx 






Desc a 


Ills 


a 


Fest 


DtSt s Dates 2001, 







040 HEC tc HEC 

041 eng 

090 HD7103.5.U5 tb P75 2001 
090 

049 HECA 

110 2 PricewaterhouseCoopers (Firm) 

245 1 Study of pharmaceutical benefit management / tc PriceWaterhouseCoopers. 

246 1 7 HCFA study of the pharmaceutical benefit management industry 
260 [New York, N.Y.?] : tb PriceWaterhouseCoopers, tc [2001] 
300 157 leaves : tb ill. ; tc 28 cm. 

500 Supported by HCFA contract no. 500-97-0399/0097. 

500 "June 2001." 

504 Includes bibliographical references. 

530 Available at cost as a print-on-demand technical report; tb National Technical Information Service; td PB2001- 
107601. 

533 Typescript (photocopy). 

650 Pharmaceutical services insurance tx Economic aspects tz United States. 

650 Drugs tx Prices tz United States. 

650 Prescription pricing tz United States. 

650 Drug utilization tx Economic aspects tz United States. 

650 Medical care. Cost of tz United States. 

650 Medicare tx Claims administration. 

710 1 United States, tb Health Care Financing Administration. 

006 fields for Books Book 

Ills Audn Form Cont 



GPub Conf Fest Indx LitF Biog 

Action Status Delete Holdings _ Export C Label _ Produce _ Update Holdings C Validate 



http://connexion.oclc.orgA/VebZ/MDisplay?sessionid=cnxs09.prod.oclc.org-52002-gq2as2eq-p804wh... 7/13/201 1 



I 



\